Asia's Economic Flu and You

By Daniel Kadlec

When Asia started sinking late last year, few of the highly paid stock market mavens in the U.S. worried much about any ripples reaching home. Too distant, too little. Too bad. But the arrogance has begun to fade. Our unstoppable bull market in stocks has, well, stopped. It is now apparent that the Far East's economic troubles have become too deep to dismiss.

Economists who once cavalierly pronounced that an Asian slowdown might even be good for the U.S.--it would help hold down inflation--are now slashing their 1998 growth forecasts and fretting about possible deflation, the broad and sustained decline of prices for everything from semiconductors to semigloss. Most agree that the growth of the gross domestic product this year, because of Asia's problems, will be a half to a full percentage point lower than earlier forecasts--in real numbers, roughly 2.5% instead of the 3% or 3.5% that was talked about last year. Meanwhile, as scores of companies prepare to report fourth-quarter earnings, Wall Street is marking down its expectations like a department store the day after Christmas. As of Sept. 26, the consensus view was that companies in the Standard & Poor's 500 would earn 13.4% more in the quarter than they did a year earlier. Today the consensus view is that earnings were up only 7.8%, says research firm FirstCall.

By a couple of measures, the thousands of analysts who study individual U.S. companies haven't been this worried about the profit picture in years. Clifford Fox, managing director at Columbus Circle Investors, keeps track of the revisions stock analysts make in their earnings forecasts. In the 10 days ending last Thursday, only 33% of the revisions made were upward ones--a two-year low for that reading. John Manley, analyst at Salomon Smith Barney, notes that December was the first time since 1992 when there were fewer upward revisions in the month than the average for that month over the five previous years.

I know that all sounds a bit pointy-headed, but the message is simple and important: Wall Street has grave doubts about corporate earnings in '98. Asia isn't just sinking, it's sinking in. "The more the analysts learn, the less they like," says Manley. That's why the stock market has gone nowhere. The bad news is that when profit momentum swings from plus to minus, it is usually accompanied by steeper stock declines than what we've seen. Look out below! The good news is that it's still too early to know if the profit cycle is really turning. We can hope that the current shenanigans ultimately represent nothing more than the fleeting worries of people who watch for such things. Indeed, technology bellwether Intel, among the first to report, said last week that it not only beat its year-ago fourth-quarter results but topped analysts' estimates as well.

But the past is not prologue: the Street pays for future earnings, and in the same breath that Intel used to pronounce last quarter's tidy profits, it also warned of some tough months ahead. The stock got pounded. Ditto Kodak a few days later, except that its profits weren't so tidy. I'm expecting a batch of replays, and if it happens that way, analysts will be letting air out of their earnings estimates for months. So when stocks fall, don't bother looking for an explanation. It's earnings angst, and Wall Street is running out of tranquilizers.

Daniel Kadlec is TIME's Wall Street columnist. Reach him at [email protected]