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Though profit estimates have been coming down lately, the fourth-quarter earnings season promises to be another good one, at least by historical standards.

But with the outlook for the first quarter decidedly less rosy, investors may have a hard time appreciating the results.

Analysts surveyed by Thomson First Call are now looking for 15.3% growth in the final three months of 2004, more than double the long-term average, thanks to respectable economic growth, a weaker dollar and a continued focus on keeping costs low.

Layoffs remained above 100,000 for a fourth straight month in December, according to outplacement firm Challenger, Gray & Christmas. And the latest nonfarm payroll report showed that hiring and wage increases have been modest.

The passage of last year's American Jobs Creation Act, which, among other things, allows companies to repatriate foreign income at a temporarily reduced tax rate, could also provide some relief this earnings season. In December,



reported a 4-cent gain as a result of the new tax law.

Michael Metz, chief investment officer at Oppenheimer & Co., said he considers the chances of any major negative surprises to be low.

"There's not going to be any real significant disappointment or we'd have heard about it by now," he said. "The new year is starting off very well."

Indeed, the negative-to-positive preannouncement ratio is down from the third quarter and slightly below the historical average. Since the start of September, profit estimates have gone up, though they are down from the start of November, when analysts were looking for 15.7% growth.

Metz said any enthusiasm over fourth-quarter results is likely to be short-lived, noting that double-digit growth probably won't be repeated in the first and second quarters of 2005.

"I think we start off the year with a bang and end with a whimper," he said.

Analysts are looking for earnings to climb just 7.6% in the first three months of the year, the weakest pace of growth since the third quarter of 2002. For the whole year, earnings are projected to rise 10.5%, down from more than 19% in 2004.

Metz said even those estimates could be at risk if the

Federal Reserve

raises interest rates aggressively and slows down economic growth more than expected.

In the minutes of the Fed's last meeting, policy officials said inflation could become a problem without further tightening. Economists are generally looking for short-term rates to climb to between 3.25% and 3.5% by the end of the year, up from 2.25% currently.

"I would expect by end of the first quarter, the picture will have changed and the universal euphoria will have given way to more skepticism," Metz said.

Brett Gallagher, head of U.S. equities at Julius Baer Investment Management, said that while he expects some companies to lower their profit estimates over the next few weeks, most of the downward revisions are likely to come later in the year.

"Expectations are building in a best-case scenario and not leaving a lot of room for error," he said. "I suspect with interest rates moving up and the economy being as unpredictable as it is, that this finds its way to earnings."

Some analysts note that high energy prices could also depress profit margins this year. So far, companies have been forced to absorb these expenses rather than pass them on to consumers. Last week,

Delta Air Lines



Northwest Airlines


and other airlines actually lowered air fares in an effort to lure customers.

Still, high oil prices do benefit the energy sector, and earnings from this group are expected to add more than 4 percentage points to overall growth in the fourth quarter.

"I have been and remain of the view that earnings and economic momentum peaked in the third quarter of 2003," said Jeffery Saut, chief investment strategist at Raymond James. "We're regressing to the mean."

Saut noted that because profit growth surged more than 20% in the first and second quarters of 2004 and remained high in the third and fourth quarters, companies will face very tough comparisons this year. In addition, he said, the possible expensing of stock options could weigh on the results.

Although companies are expected to keep their costs in check over the coming year, analysts say operating margins aren't likely to expand from historically high levels. What's more, they say, any gains from a weaker dollar should be treated with caution. A soft dollar can boost demand overseas for U.S. goods and can make currency translations more favorable.

"You don't want to pay for growth that comes strictly from a weaker dollar," said Ed Keon, chief investment strategist at Prudential Equity Group. "That is always a lousy idea."

The bulk of fourth-quarter earnings will be released in the two weeks beginning Jan. 17. As has been the case in recent quarters, energy, basic material and technology companies are expected to post the strongest growth; telecom, utilities and consumer discretionary companies will be among the weakest performers.