First-Quarter Profit Growth Seen Close to 10%

IBM's earnings shortfall sent a chill wind through Wall Street, but this week's deluge of quarterly reports offered reassurance, and now some analysts see double-digit profit growth.

"You take the earnings reports out there and we could end up being pretty close to 10 percent earnings growth, when you've had the earnings consensus come down over the last few weeks to more like 7 or 8 percent growth," said John Caldwell, chief investment strategist at McDonald Financial Group, part of KeyCorp.

On April 14, International Business Machines Corp. (IBM) reported first-quarter results that fell short of expectations and sent stocks reeling the next day. Since that day, its shares have fallen more than 11 percent.

But this week brought cheerier earnings news from technology companies, including chip maker Intel Corp. (INTC) , Google Inc. (GOOG), Yahoo Inc. (YHOO) and cell phone companies Nokia (NOK) and Motorola Inc. (MOT).

"Even though there's going to be an earnings deceleration in 2005, it's to be much less damaging than previously anticipated," Anthony Chan, managing director and senior economist at J.P. Morgan Asset Management, said Friday. "We're seeing a little better activity from the growth sector. The Google numbers blew me away."

Forty-nine percent of the companies in the Standard & Poor's 500 have reported earnings so far, according to data from S&P. Of that group, 66 percent have topped Wall Street estimates, up from 55 percent last Friday.

S&P has forecast a 9 percent increase in operating income for the first quarter, but this week's results are changing the outlook.

"A few positive earnings surprises could boost the number to the 10 percent level," Howard Silverblatt, equity market analyst at S&P, wrote on Friday.

But this week also saw some disappointing results from a mixed group of companies, including Costco Wholesale Corp. (COST), 3M Co. (MMM), Maytag Corp. (MYG), Qualcomm Inc. (QCOM) and Avaya Inc. (AV).

And companies that disappointed Wall Street on either profits, revenues or outlooks, saw their shares get whacked.

For example, 3M reported a better-than-expected profit, but its global sales disappointed the Street, sending its shares down 6 percent.

"In this environment, the market is more apt to punish those who fail, and less anxious to reward those who do better than anticipated," J.P. Morgan's Chan said. "The companies that are having trouble like 3M are more indicative that we're moving to a more mature stage of the economic recovery."

Investors see a company like 3M as increasing its earnings more modestly in the later stages of the recovery, Chan said.

For the first quarter, the materials sector is expected to log a 47 percent gain in operating earnings, S&P said.

At the other end of the spectrum, health care companies are expected to end the quarter with a 3.5 percent decline in earnings, according to S&P.