New Year, Same Problem

"The estimates are certainly coming down for 2008, but they're still higher than this past calendar year," said John Butters, research analyst with Thomson. "Since 2007 estimates have been dropping faster, the growth rate for 2008 is actually increasing."

While earnings growth may improve, investors will still have to contend with a slowing U.S. economy, as growth will likely disappoint for at least a few months.

In statements that followed its last three meetings of 2007, the Federal Reserve went as far as to say economic expansion will continue to slow over the near term. At those meetings, the central bank lowered the fed funds rate by a combined 100 basis points to 4.25% in order to promote economic growth.

With the next two-day Federal Open Market Committee meeting scheduled for the end of January, most expect the central bank to continue cautioning Wall Street about the risks of higher inflation and slowing growth.

Hopes are that further rate reductions in the new year will couple with cuts in 2007 to help stabilize U.S. equity markets. Pavlik says he would like to see further reductions in the fed funds rate of at least 25 basis points at each of the policy meetings scheduled for January, March and April. His forecast is for the rate to hit 3.50% by year-end.

"Additional rate cuts are needed to continue the flow of capital through the financial system and to promote growth, as well as confidence to individual consumers and businesses alike," he says. "However, with core inflation back over the target high of 2%, I am less optimistic this will occur."

One bright spot for the U.S. economy in 2007 was the strength of U.S. exports, thanks to a perpetually weakening dollar. Sheldon says that the soft greenback, the strong global economy and a slower pace of imports have worked to reduce the trade deficit in 2008.

"Over time, this should help halt the dollar's slide and reduce inflation, as the stronger dollar will make imports more affordable," Sheldon says. "Strong exports are also cushioning the economy from bearing the full brunt of the housing downturn. If the U.S. economy is to avoid a recession, continued strength in exports will be crucial."

Paul Mendelsohn, chief investment strategist with Windham Financial, says that a bulk of the economic recovery effort will have to do with what the government's nonfarm payrolls reports say about job growth over the first half of 2008.

"If we begin to lose jobs, it would certainly make things worse," says Mendelsohn. "If we fall into a recession, it will continually feed upon itself."