In recent weeks investors have brushed off disappointing economic data, focusing squarely on the war with Iraq. Can they do the same with poor earnings numbers?

It doesn't seem likely, now that the focus of attention has started to shift on Wall Street. Although the war isn't over yet, investors feel it soon will be, and so they're turning their attention to weak corporate fundamentals. On Monday, for example, the

Dow

almost erased a 230-point gain as worries about earnings began to surface, and the tone was again shaky on Tuesday. Still, that doesn't mean that the market is in for the same kind of drubbing it endured during the last earnings season.

Back in mid-January, stocks plunged as companies reported fourth-quarter results and warned of further weakness ahead. At the same time, however, investors were psychologically preparing for war, as tensions with Iraq continued to mount. This time around, signs that the war is coming to an end could offset at least some of the damage.

"I suspect that, near term, we're not going to get the kind of selloff we would normally get from a bad earnings season, just because investors may be saying 'let's write this quarter off due to the war,'" said Brett Gallagher, head of U.S. equities at Julius Baer Investment Management.

First-quarter earnings certainly won't be pretty. According to Thomson Financial/First Call, analysts are looking for quarterly earnings growth of 8.4%, or just 1.8% if the energy sector is stripped out. The outlook for the second quarter is also troubling, with analysts calling for 6.8% growth, or 5.1% minus profits from the energy sector. Given the negative earnings growth in the first quarter of 2002 and close to zero rate in the second quarter of last year, these numbers are far from impressive. Of course, it's possible that investors will overlook both quarters in anticipation of better times ahead.

Among companies issuing first-quarter profit or sales warnings recently are

Siebel Systems

(SEBL)

,

RF Micro Devices

(RFMD)

and

Accredo Health

(ACDO)

.

Others are

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(SHW) - Get Report

,

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Nautilus

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and

MeadWestvaco

(MWV)

. For the most part, stocks have fallen on the news.

"The earnings estimates are all back-end loaded," Gallagher said. "People think things are going to pick up later in the year, but the estimates that are priced in are just too aggressive."

For the third and fourth quarters, analysts are calling for profit growth of 13% and 22%, respectively, amid hopes for a rebound in business spending. In the technology and basic materials sectors, analysts are expecting particularly large leaps, despite relatively difficult year-on-year comparisons. For the third quarter, they expect growth of 54% and 25%, respectively.

This optimism stems from hopes for a solid economic recovery in the second half of the year. The National Association for Business Economics forecasts gross domestic product growth of 2.7% in 2003, compared with 2.4% in 2002. Expansion in the second half is expected to exceed 3.5%.

A resolution of the Iraq conflict along with stimulative monetary and fiscal policy should create "much stronger conditions in the latter half of this year," according to the panel. Although there is concern about the sharp increase in the budget deficit, panel said tax cuts should boost economic growth and that the broader recovery will result in more tax revenue for the government.

Still, some analysts question whether the trickle-down economics theory will work, and they worry that investors will be disappointed later this year, just as they have been for the last two years.

Though most economic downturns have been induced by high interest rates, market watchers note that this one was not. In fact, the sectors that have fared the best over the last few years have been the ones most sensitive to interest rates. Because the

Fed

is closer to the end of its rate-cutting cycle than to the beginning, some analysts question where the pickup is really going to come from. As for fiscal relief, these analysts point out that most of the benefits of a tax cut wouldn't be seen this year anyway, and that tax rebates did little to stem the weakness in the economy back in 2001.

"You may see a recovery, but it's definitely not going to be of the strength that people are pricing into the market," Gallagher said.

Salmon Smith Barney economist Steven Weiting isn't so sure. In fact, he believes growth of more than 3% is possible in the third quarter. "There are natural forces of economic growth that have lifted man from cave dweller to space traveler, yet no one seems to believe in these forces," he said, citing higher national income and the growth of the population that can work.

He also noted that temporary sources of growth such as a drop in oil prices, mortgage refinancing and deficit spending will also contribute to growth. "Consumer spending has been weak for one quarter, and the business-sector recovery has about six months of war anxiety in current spending levels," he said. "This points to a modest accumulation of pent-up demand."

Nevertheless, he conceded that profit expectations are too high. "Current 'bottom up'

S&P 500

EPS estimates for calendar 2003 still show a 12.2% gain, even with first-half 2003 GDP growth estimated at 1.5% or less," he said. "Firms now seem likely to take down guidance for a postwar ramp-up."

Whether stocks react to the downsizing of profit estimates for the first half of the year remains to be seen. Geopolitical events -- either good or bad -- could once again cloud the earnings picture, and developments related to President Bush's tax plan could also have some impact. But one thing is clear: Earnings estimates for the latter half of the year remain uncomfortably high, and when they come tumbling down -- as they surely will -- investors may be much less willing to overlook them.