Fears about corporate profits going into 1996 turned out to be unfounded, but 1997 might be a different story, according to a report by Harbor Capital Management Co. Inc.
Corporate profits have experienced double-digit growth for 15 straight quarters, and more than half of the companies in the Standard & Poor's 500 Stock Index exceeded earnings expectations for each of the last eight quarters, said Harbor, citing figures from Zacks Investment Research.
Healthy profits stemmed from low interest rates, corporate restructuring, modest wage pressures, a weak dollar, increased exposure of U.S. companies to faster growing economies and strong capital spending, according to Harbor.
But some of these factors are becoming less positive. Companies have fully exploited the benefits from low interest rates. "From current levels, it would take another plunge in interest rates or a massive refunding of debt with equity to reduce the percent of income going for interest payments any further," according to the Harbor Capital report. In addition, "the shrinking headcount phenomenon is nearly complete for this cycle."
What's more, the dollar has stabilized and the rate of growth in capital spending has decreased.
Despite its forecast of a slowdown in profit growth, Harbor remains bullish because of low inflation and steady interest rates. "Profit disappointments will be company specific. Investment money will .*.*. flow toward those companies that are able to keep their profits rolling merrily along," the report said.
