The Outlook for 1997 United States Corporate Earnings

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The March survey of 2,500 security analysts affiliated with over 200 institutional equity research firms, conducted by the Institutional Brokers Estimate System (I/B/E/S-U.S. edition), is forecasting a 15.8% increase in U.S. corporate earnings in 1997. The forecast is based on the United States I/B/E/S Universe of 5,681 publicly traded firms as of March 20, 1997. The expected growth rate for 1998 is 16.9%. The growth rates expected for the Major Market Indexes are slightly lower. Based on the current composition and shares outstanding, the S&P 500 earned $40.89 on an operating basis in 1996. Operating earnings are expected to increase 12.3% in 1997 to $45.93 and grow 14.3% in 1998 to $52.50. For the S&P Industrials, an increase in earnings of 13.5% is expected for 1997 (EPS of $48.91 is expected) and growth of 15.6% is anticipated for 1998 ($56.55). For the Dow Jones Industrial Average (DJIA), earnings are forecast to rise 13.3% in 1997 ($426.67) and 13.5% in 1998 ($484.20).

The growth in operating earnings for all of the major indices is expected to be higher than last year's single digit rate of growth. We continue to be of the belief that there will not be a recession in 1997. Year-over-year quarterly earnings growth rates for the S&P 500 and the S&P Industrials are expected to accelerate above 10% for all four quarters of 1997. Last year, the quarterly growth rate was above 10% only in the fourth quarter.

We do not believe that the Federal Reserve's 25 basis point increase in the Federal Funds target rate will cause a sharp downward spiral in earnings forecasts. Short-term interest rate sensitive industries that will be affected include Banks, Insurance and Investments. However, further increases in the Federal Funds rate will likely cause earnings forecasts to decrease in the Housing and Automobile industries. The move by the Federal Reserve appears to be a warning shot that has been fired in the expectation of future increases in the rate of overall inflation.

Given that the Federal Reserve has increased rates, we believe it would be wise to avoid "Fighting the Fed". However, our primary concern in the near term is that earnings forecasts for multinational corporations will be negatively impacted by the continued strength in the dollar and in the deterioration of the quality of consumer credit lending.

ESTIMATE REVISION TRENDS

As measured by the broad aggregates, earnings expectations have fallen in the past three months. The 1997 mean estimate for the I/B/E/S Universe is down -0.9% and the 1998 estimate is down -0.8%, less than the historical average decrease of 3.3%. The change in the 1997 estimate over the past three months for the S&P 500 (-0.9%) is the same as the I/B/E/S Universe. The 1997 forecast for the DJIA and the S&P Industrials have both declined-1.2%. The earnings forecasts for the S&P 500 are expected to decline faster than the S&P Industrials index because the S&P 500 index includes those financial companies that will be hurt by an increase in interest rates and a deterioration in loan losses.

Forecasts for the S&P 500 have historically declined -1.1% per month. Over the past three months, the forecast has decreased an average of -0.3% per month, slightly better than our expectations of a -0.4% decrease per month. Our assumption is that earnings forecasts will decrease an average of -0.4% per month for the foreseeable future. Given that, we expect that that the forecasted 1997 earnings growth rate for the S&P 500 will decline from it's present level of 13.9% to a range of 8.0% to 9.0% by the end of the year. Any improvement in the commodities prices in industries such as Aluminum, Paper, Steel and Semiconductors would likely cause us to increase our growth forecast for 1997.

ECONOMIC SECTOR GROWTH OUTLOOK

The Technology sector is expected to post the highest earnings growth in 1997 at 34. …