Double-Digit Profits Take a Dip

After 13 straight quarters of double-digit growth, bottom lines could finally be showing signs of mortality.

According to David Dropsey, an analyst with Thomson First Call, Wall Street is projecting 9.1% overall earnings growth for the S&P 500 for the fourth quarter of 2006, down from the estimate of 10% growth just three weeks ago. In the fourth quarter of 2005, earnings jumped 14.4%.

But while Corporate America's astounding streak of double-digit earnings growth may have ended, analysts still expect companies to deliver strong fundamentals in the upcoming reporting season.

As well, there's still room for stronger-than-expected growth. A lowering of expectations before companies start to report results is typical.

"As companies start to report, they're going to beat expectations, so we still expect the growth rate will break back above 10% growth and extend the streak to 14," says Dropsey. "That will probably be it, because comparisons are just getting too tough. We've grown so fast for so long, there's no way we can keep it up."

Most economists are forecasting at least some moderation in economic growth for the new year, and investors that have enjoyed a four-year bull market may be starting to get wary of stocks that keep climbing to new highs. Still, actual profit numbers continue to be solid, even if they aren't as impressive as in recent periods.

"The fact that we're not falling off a cliff in earnings after this enormous bull run of growth shows you that the markets are still strong," says Dropsey. "Prices of stocks continue to rise, and the fundamentals are there to back it up."