If past is prologue, corporate profits could show little or no growth in 2005.

While few analysts have espoused this view, history shows that it could happen if economic growth decelerates as expected and profit margins decline from peak levels.

Official forecasts put earnings growth at 10.6% next year, down from about 19% growth in 2004, according to Thomson First Call. But the conditions for a much softer number could be in place.

Economists surveyed in the Blue Chip Economic Indicators newsletter recently predicted that gross domestic product would slow to around 3.5% next year from 4.4% this year, as consumer spending moderates amid higher interest rates.

Meanwhile, many analysts say very strong profit margins are unsustainable. Pretax profits as a percentage of gross domestic product, adjusted for inventories and capital consumption, were sitting at 10.1% in the second quarter, up from a low of 7% in the third quarter of 2001 and above the 35-year average of 8.4%. (Because tax rates change over time, pretax margins allow for more accurate comparisons.)

"The level is very high by historical standards and the run-up over the past three years is rare," said Ron Wexler, an economist at Merrill Lynch.

If a deceleration in profit margins and a slowdown in the economy were to coalesce next year, the implications for earnings could be profound. Whenever these two events have coincided in the past, profit growth tended to flatten out or even decline.

In 1989, for example, real economic growth slowed to 3.5% from 4.1% and margins slipped to 7.8% from 8.5% the year before. As a result, pretax profits fell 1.4% after growing 17.3% in the previous year. Data from Merrill show similar results on six other occasions over the past 50 years.

John Caldwell, chief investment strategist at McDonald Financial Group, doesn't believe earnings will flat-line next year but said consensus estimates are too high.

"Earnings don't normally grow faster than nominal GDP," he said, adding that this is likely to reach 5.5% to 6.5% next year.

While continued cost-cutting and high levels of productivity could push earnings up as much as 9% for the year, Caldwell said anything more than that is unlikely, given that companies will face tougher comparisons and higher inflation going forward.

Barry Ritholtz, market strategist at Maxim Group and a contributor to

TheStreet.com's

sister site

RealMoney

, is also skeptical about analyst forecasts.

He said 10% earnings growth presumes that there's no major terrorist attack in the U.S., that oil continues its pullback from $55 a barrel and that productivity gains remain very strong.

"If we were to get 10% or 12% earnings growth, it would mean a whole bunch of stuff went exactly right," he said. "I would be looking at this point for 6% or 7% and that presumes that something in this mix goes against us."

Still, other market watchers say the consensus estimates are achievable.

Although high oil prices could crimp profit margins next year, Michael Strauss, market analyst at Commonfund Treasury, said the falling dollar could lend support, as multinational firms benefit from more favorable currency translations and from greater demand overseas.

The dollar recently slid to a record low against the euro and is expected to weaken further over the coming year, as investors remain concerned about the huge trade and budget deficits in the U.S.

Strauss also noted that hiring is likely to remain "careful" going forward, which should keep corporate costs low. The downside to this, of course, is that consumers will have less money to spend.

Jeff Bagley, portfolio manager for McCabe Capital Managers and contributor to

Street Insight

, said that while profit margins are at all-time highs now, there's no reason they can't go higher.

"If productivity growth is positive, then margin expansion becomes a secular story," he said. "Furthermore, there is still a great deal of slack in the economy, as measured by industrial capacity utilization. So there is definitely room for margin expansion."

Some analysts also believe that economic growth will be stronger than expected next year, providing further support to earnings.

"Over the long term, 3% GDP growth is needed to produce earnings growth of about 7% or 8%, and I think there's upside risk to GDP," Strauss said.

While the extent of the deceleration in profit growth probably will be debated for some time, analysts agree that a slowdown is coming as interest rates rise, comparisons get tougher and companies have more trouble cutting costs. Whether investors are fully prepared for that remains to be seen.

"We struggled during third-quarter earnings season with the massive deceleration all the way down to 17% from 20%," said Caldwell. "How are investors going to deal with single-digit growth year over year?"