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Profits strong, but slowing
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July 5, 2000: 6:12 p.m. ET
Experts seen strong 2Q, 3Q, but pace of profit growth seen easing by 2001
By Staff Writer Franklin Paul
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NEW YORK (CNNfn) - Don't let the revelation of difficult quarters from high-profile names like Procter & Gamble alarm you. Corporate profits are charging ahead at a healthy pace, and should continue to do so for the rest of the year, although the rate of growth will slow, experts say.
But the combination of elevated interest rates and swollen costs for raw materials and energy could slow corporate profit growth in the early part of 2001 to about half of what it was in the same period this year.
Second quarter corporate earnings are forecast to be strong, despite warnings by household names such as Goodyear, Computer Associates, and Del Monte, which each have told Wall Street analysts that their quarterly results will fall short of previous estimates.
 "Second quarter earnings are very likely to be satisfactory in aggregate," said Charles Crane, portfolio manager at Spears, Benzak, Salomon & Farrell. "A number of visible companies have warned of disappointments, but they are the exception rather than the rule. Earnings growth will probably be in the high-teens range when everything is tallied up."
Analyst predictions of earnings growth near 18 percent, while impressive, would represent a sequential decline from the first quarter when profit growth for companies in the S&P 500 swelled more than 23 percent, powered by the potent economy.
The Federal Reserve Board's moves to cool the economy through steady interest rate increases will not be seen in most companies' second quarter figures.
"Was the (robust) first quarter an anomaly? Hell no," said Chuck Hill, Director of Research at earnings tracker First Call/Thomson Financial. "We are going to see the same thing in this quarter. The economy has been very strong."
"There are obviously signs the economy is slowing but it's not showing up yet in earnings, and probably won't in the third quarter," Hill added.
Computer Associates extends high-profile warnings
Higher interest rates have put the brakes on consumers' urges to buy big ticket items on credit, and forced corporations to weigh the timing of purchases, an effect desired by the Federal Reserve chairman Alan Greenspan.
Many corporations' bottom lines have also been bruised by expensive raw materials and high energy prices, including crude oil prices that have been at unprecedented highs over the past few months. At around $30 per barrel, crude oil has hovered at more than double the price of a year ago.
This week, the roster of company pre-announcing disappointing results grew to include BMC Software Inc. (BMCS: Research, Estimates) and Computer Associates (CA: Research, Estimates), which warned that it won't meet profit expectations for its fiscal first quarter due to weak European sales and delays in closing contracts.
 In the past two weeks, H&R Block, Xerox, Wachovia, Proctor & Gamble, Goodyear, Unisys, Honeywell and Del Monte joined the warnings club.
That's no reason for panic, First Call's Hill said. About 185 companies have issued profit warnings so far; by the time pre-announcements are all in, that figure is likely to exceed the 225 warnings in the March quarter but trail the average of 370 warnings, he said.
"Every quarter, people get all upset when the pre-announcement season is on and it always has a negative bias," said Hill. "I don't think there is anything to be alarmed about."
Energy, technology seen as strong sectors
Looking ahead, profit growth is expected to shrink in the fourth quarter and in the early part of 2001, as the economy absorbs the full brunt of interest rate changes.
But experts say it's difficult to pin down how businesses will fare next year with so many variables in play, such as the potential for further rate hikes, OPEC's pledge to address high oil prices, and consumers' propensity to spend during the pivotal fourth quarter holiday seasons.
"(For 2001) annualized growth in the 10 percent range is not too far off of the mark," Crane said, citing analysts' early projections. "Perhaps a little slower in the beginning of the year, and maybe a little faster later on in the year."
 Market watchers are keeping an eye on the Internet economy, to see if 1999's tide of Web surfers again becomes a legion of Web shoppers.
For the rest of 2000, experts are betting on continued strength in technology and energy companies, as Hill told CNNfn's Before Hours on Wednesday. (560K WAV, 560K AIFF).
"The sector that will lead the pack is energy," said Crane. "All energy prices are high. And as one domino falls, many other tend to follow. The oil service sector will enjoy the benefits of higher oil prices too."
"Technology will continue to post very strong earnings growth - but it will be cooler than it has been," he added. "In an absolute sense it will be very hot, but it will not be scorching the rest of the world."
Douglas Cliggott, U.S. equity strategist for J.P. Morgan, told CNNfn on Wednesday that investors must also study their portfolios and make sure to be diversified. (583K WAV, 583K AIFF).
He added that he prefers the industries like drugs and certain food stocks, where earnings growth tends not depend on the economic cycle.
"So whether growth slows a little or a lot, pharmaceutical earnings growth tends to be in the 15 to 16 percent range," he said. "And we think Pharmacia is just a great pharmaceutical stock as well as Pepsi and General Foods." 
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