Wall Street analysts are extremely optimistic about corporate profits this year. And that could turn out to be very, very bad for an already-shaky stock market.
To be fair, analysts are always extremely upbeat at this time of the year.
For one thing, they and their brokerage firms make money selling stocks to investors. And caution at the beginning of a new year just isn't a good way to inbue confidence in clients.
Second, current high stock prices can only be justified if you believe earnings will continue to rise at very, very impressive annual rates. So analysts believe.
These analysts will usually become more realistic as the year goes on and as companies disclose additional information about how business is shaping up.
But this year Wall Street is so optimistic that the letdown could be enormous.
For instance, IBES says that analysts right now are expecting the companies that make up the Standard & Poor's 500 index to enjoy an enormous 16.8 percent increase in profits in 2000. In the first quarter of this year, they are looking for a 16.5 percent earnings jump.
The bar as they say in the high-jump is extremely high. And if you were watching the 31 percent drop in value of Procter & Gamble's stock earlier this week, you already know that investors aren't very forgiving of companies that can't jump as high as they are expected.
Over the next few weeks, some companies will likely pre-announce their first-quarter results. This is a tradition that started years back and is intended to short circuit the kind of panic that P&G; experienced.
But investors won't really know the full extent of any earnings letdowns until well into April, when the bulk of companies start announcing their actual first-quarter earnings. Executives often use those reports to project results for the rest of the year. And what are companies going to say about the rest of the year?
This will vary, of course, by industry. But it is very likely that all companies will make note of the fact that higher interest rates and rising oil profits are hurting earnings. At the very least, corporate execs will probably try to make Wall Street expectations more realistic.
Right now Wall Street is expecting a lot even more than last year.
IBES says corporate profits rose 18.5 percent in 1999. And 1999 was one of the few times that analysts underestimated profits. At this time last year, analysts expected earnings growth of just 15.6 percent.
As it turned out, Wall Street was expecting too much profit growth in 1998, '97 and '96. In 1996, Wall Street was expecting profits to rise 11.7 percent, but the gain was only 8.7 percent.
In '97, the Street was expecting 13.2 percent and it got 9.8 percent. Expectations were for 11.5 percent growth in '98. But profits fell 1.6 percent.
The old saying goes something like: If you don't expect too much, you won't be too disappointed. Today, Wall Street is expecting a lot more than in any of the four previous years, when energy prices and borrowing costs were a lot more stable.
It's too early to see what the full impact will be of the P&G; warning. IBES says that analysts have become only a teeny bit more cautious in the 24 hours after the alert from the big consumer product companies
But the P&G; fiasco is the sort of event that'll cause company treasurers to recalculate their profit forecasts.