Subpar U.S. growth outlook gives investors pause

* Big quandary: can stocks outperform on subpar growth?

* Analysts expect earnings to grow 27 percent in 2010

* High unemployment, fiscal burden to weigh on U.S. growth

By Herbert Lash

NEW YORK, Feb 4 (BestGrowthStock) – U.S. corporate earnings are
beating analysts’ estimates at a near-record pace, yet some
investors warn that long-term economic growth will be subdued,
hurting profits.

Fourth-quarter profit (Read more your timing to make a profit.)s for S&P 500 companies — the
benchmark for large-cap U.S. stocks (Read more about the stock market today. ) — are up 206 percent from
a year earlier, when the credit crisis ravaged corporate
earnings, according to Thomson Reuters.

With 59 percent of companies in the S&P 500 already posting
results, three-quarters have topped estimates. That’s just shy
of a 79-percent beat rate in the previous quarter, the highest
rate since Thomson Reuters began tracking the data in 1994.

The consensus on Wall Street calls for 27 percent profit
growth this year for companies in the Standard & Poor’s 500
Index (.SPX: ) as the U.S. and global economies rebound from the
worst economic downturn since the Great Depression.

Still, some investors question the upside potential for
stocks amid a lackluster outlook for demand and unease over the
government’s increased intervention in the economy.

“Growth will be slower than the prior 10 years, and that
makes us a little hesitant about where the markets might be,”
said Enrique Chang, chief investment officer at American
Century Investments in Kansas City, Missouri, where he helps
oversee about $85 billion in assets.

Despite a long-term bullish outlook for the U.S. economy,
Chang said in general, American Century was underweight
equities and overweight both U.S. and non-U.S. credit because
of the uncertain environment.

“We are still working out of a financial and banking
crisis,” said Chang, who was early to foresee a U.S. housing
bubble. “So that uncertainty, no matter what bottom-up earnings
are predicted to be this year, is hanging over us.”
MUTED RECOVERY SEEN

The U.S. recovery is expected to be fairly muted by
historical standards, Deutsche Bank’s private wealth management
said in a report on the global outlook on Wednesday.

Stocks historically post robust returns in the year leading
up to interest-rate increases by the U.S. Federal Reserve,
which is not expected until the latter end of 2010, Deutsche
Bank said. After rate hikes begin, stock returns moderate.

That may be why many analysts see a bright earnings
outlook, yet others fear subpar growth will take a toll on
stocks.

A jump in U.S. economic growth to a 5.7 percent pace in the
fourth quarter was largely based on the restocking of depleted
inventories, which is now over, said Nigel Gault, chief U.S.
economist at IHS Global Insight in Lexington, Massachusetts.

“We’ve got to be very cautious about what it implies for
the future,” Gault said about the surprisingly strong gross
domestic product number. “I don’t think it changes the story
that this is still likely to be a relatively subdued recovery
by historical standards.”

Even though final demand and high unemployment show a slow
recovery, large corporations have experienced a rebound as
costs were reined in and demand in emerging markets snapped
back. This helped companies like Cummins Inc (CMI.N: ) and
Emerson Electric Co (EMC.N: ) beat expectations this week.

Earnings tend to recover at an above-average pace during a
recovery. Analysts expect the S&P 500 to earn $77.17 per share
this year, up from $56.40 in 2009, said Howard Silverblatt,
senior index analyst at S&P index services.

Charles Blood, senior market strategist at Brown Brothers
Harriman, said analysts’ expectations strike him as reasonable
for the second year of a recovery. Profit margins will expand,
as they should, during the recovery, he said.

“I don’t think they’ve gotten ahead of themselves,” Blood
said of analysts’ expectations. “I don’t think the analysts
have climbed out on some strange forecasting limbs here.”
S&P 500 WELL OFF ALL-TIME HIGH

Despite decent corporate earnings, dividends are unlikely
to match pre-crisis levels for several years, a sign of a
still-weak recovery, he said. The S&P 500 ended Thursday about
33 percent off its lifetime high of 1,576.09, set in October
2007.

“We think it’s going to be a positive year for dividends.
But we think it’s not going to be until 2013 for that dividend
check to be the same as 2008,” Silverblatt said.

Bob Froehlich, senior managing director at The Hartford
Mutual Funds, is optimistic about the prospects for stocks for
three reasons: the restocking of depleted inventories has not
been fully appreciated, consumer spending will rebound at a
stronger rate than expected and global growth will provide a
bigger-than-expected boost to the U.S. economy.

However, Froehlich said, “it would certainly trip us up if
we do have subpar growth, but I don’t think we will.”

Stock Report

(Editing by Padraic Cassidy)

Subpar U.S. growth outlook gives investors pause