11/17/97 THE YEAR AHEAD: A LITTLE LETUP, BUT NO GLOOM AND DOOM

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THE YEAR AHEAD: A LITTLE LETUP, BUT NO GLOOM AND DOOM

Recent gyrations in world markets have caused tremors on the earnings front. Even as Corporate America reported solid third-quarter results, fears rose that Asia's upheaval could bring down the curtain on the longest, strongest profit cycle in modern economic history. At six years and counting, the best is behind us, say many economists.
They're right--sort of. Certainly, earnings growth has slowed from the torrid 40% pace of its 1994 peak, and margins, now at 6.2%, may have topped out. But that doesn't mean gloom and doom are on the way. The wide array of industries that should post decent 1998 numbers may well balance out the spectacular declines of a few laggards. ''Individual companies will be punished,'' says Edward M. Kerschner, chairman of PaineWebber Inc.'s investment-policy committee, ''but aggregate earnings are not really off the target at all.''
FLIP SIDE. By Kerschner's estimate, earnings per share among companies in the Standard & Poor's 500-stock index should show 12% growth in the third quarter. For next year as a whole, he expects a still respectable 8%. Among the industries where domestic growth should buoy earnings are health care, telecommunications, consumer goods, and airlines.
Given Asia's turmoil--and the longevity of this boom--can such profits continue? Let's start with Asia, where any prolonged slowdown could hurt parts of the U.S. economy. Construction and capital-goods companies involved in infrastructure projects face the risk that many of them may be spiked. Producers of chemicals and other commodities also could suffer from falling Asian demand. DuPont Co. economist Robert H. Shrouds warns that this could create downward price pressure.
But there's a flip side: Companies that buy components or manufacture in Asia, such as Compaq Computer Corp. and Staples Inc., will benefit from lower costs. Ford Motor Co. Chairman and CEO Alexander J. Trotman said at the Tokyo Motor Show in October that weakening currencies could favor producers in countries such as Thailand and Vietnam. Asian consumer demand isn't likely to dry up, either. Says Kerschner: ''[Asians] are going to buy less Gucci bags and Mercedes, but they'll still drink Coca-Cola, eat potato chips, and wash their hair.''
On the home front, the fundamentals also favor continued earnings gains, thanks in part to low interest rates. The low cost of money means corporate interest payments have steadily fallen. ''There's been a big paydown of outstanding debt by the corporate sector,'' says Bruce Steinberg, chief economist at Merrill Lynch & Co. That helps keep costs down even as wages inch up.
Perhaps the biggest surprise is that some companies can still cut costs. In August, Southwest Airlines Co. consolidated its engine maintenance work by signing a 10-year deal with General Electric Co. The savings will be in the hundreds of millions of dollars. The upshot: The earnings engine is slowing--but it hasn't stalled yet.
By Jennifer Reingold in New York, with bureau reports

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