An Appraisal: Earnings Forecasts May Be Setting Stage for Letdown
Expectations are running high on Wall Street that higher corporate profits will fuel a rise in stock prices that will keep them at record levels for many months to come.</br></br>But some analysts warn that investors' expectations may be running too high, pumped up by wildly positive earnings results in the first quarter. They believe the stock market might be vulnerable to disappointments in the next few weeks, as second-quarter results are released, if the actual reports don't surpass expectations.</br></br>"It's hard to envision that earnings across the board will exceed the already high expectations that we are now seeing," says Jeffrey Applegate, an investment strategist with E.F. Hutton in New York.</br></br>According to Institutional Brokers Estimate System, a service of Lynch Jones & Ryan that monitors Wall Street analysts' earnings estimates, upward revisions in estimates exceeded reductions during the month from mid-April to mid-May. That's the first time it's happened in nearly seven years, says Stan Levine of IBES. From mid-May to mid-June, upward and downward revisions were even.</br></br>Another problem for the stock market is that the rate of earnings growth will decelerate significantly next year after peaking in the fourth quarter. Since stock prices tend to be a leading indicator, the stock market's advance could stall well before corporate profit growth slows, analysts caution.