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It may take some time before either businesses or consumers are feeling anything like the degree of largess they were just a year ago, and that will filter through to many companies' bottom lines. As

Morgan Stanley Dean Witter

chief U.S. investment strategist Byron Wien puts it, "Business expansions that last 115 months don't unwind all of their excesses in six months. Whether we're in a recession or not, we're in a profits recession and it might take a while for them to come back."

In fact, such excesses on the corporate side of things may mean that even if the overall economy puts on the lauded V-shaped recovery, profits may not come back so quickly.

Salomon Smith Barney's

economists, for example, believe that the economy will respond well to the Fed's series of rate cuts, putting on 4% growth in the latter half of the year. But they don't think there's going to be any growth at all in S&P 500 profits until the fourth quarter, and even then they expect full-year profits to come in essentially flat with last year. Industry analysts are expecting growth of 5.5% on the year. There could be a lot of disappointment on Wall Street in the months to come.

Satori?

Even so, Salomon Smith Barney equity strategist John Manley has a relatively sanguine view of the stock market's prospects. For one, given the choice between an accommodative Fed and earnings growth, he'll pick an accommodative Fed. Moreover, he notes that historically stocks as a whole have done better when profits growth is declining rather than rising.

"Earnings run counter to the market," says Manley. "It's the market's anticipation of recovery that makes a difference."

The market works like a giant predictive engine, each investor a cog, each trade a turn of the wheel. As such, it is moving not so much in response to what has happened but on changes in the expectation of what will happen. The Fed is moving to bring growth back to the economy that will eventually reaccelerate earnings, and despite the disappointments that might come along the road, we are, in Manley's view, in a supportive environment for stocks.

There is another reason the falloff in corporate earnings may not spell disaster for stocks. The Fed's rate cuts have brought

Treasury

yields down sharply -- the yield on the 10-year has fallen from a high of 6.8% at the beginning of last year to 5.2% today -- and meanwhile the P/E on the S&P 500 has fallen to 23. The falloff in bond yields makes them a relatively less attractive investment, while the drop in stocks has taken a lot of risk out of them. In fact, the model that J.P. Morgan's Cliggott uses says that the S&P is fairly valued. As a result, "We see a lot more risk in certain sectors of the market than in the broad market."

With a protracted profits slump, it may be that cyclical areas of the economy -- auto manufacturers, capital equipment companies, technology companies and the like -- will continue to have their problems in the stock market. But as the economy mends, it could well be that management will matter as much as sector. Those companies and industries that have been able to quickly adjust to the slowing economy, clearing excess inventory and capacity, will be in a position to thrive as growth reasserts itself. Those that, like many investors, never believed in the possibility of their business slowing, will be left to twist in the wind.

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