When they list all the reasons why the stock market has shown so much enthusiasm over the latest slowdown in the economy, most Wall Street analysts make no mention of the outlook for corporate profits.
In fact, many of them acknowledge, uncertainty about earnings prospects looms as a big potential stumbling block in the way of continued gains in stock prices from their recent record highs.In the market's much-heralded advance since late April, financial observers have cheered the drop in interest rates that greeted slower-than-expected growth in employment and production.
It is also great news, they say, that the threat of a resurgence of inflation has faded as business activity turned sluggish again.
But followers of the market are left to wonder how long stocks can keep climbing without encouragement from hopes for a sustained expansion of earnings to justify higher share prices.
"There seems to be too much `heads we win, tails we win' thinking," says Rao Chalasani, analyst at Prescott, Ball & Turben, the Cleveland-based investment firm. "There is no solid evidence that the profit margin squeeze is coming to an end."
Or as Byron Wien writes in a current market commentary for Morgan Stanley & Co., "The current investment attitude does not look properly balanced. Only the sweet side of the slowdown is being factored into stock prices."
Optimists maintain that stock traders, as a group, can sense favorable forces for the long-term profit outlook long before there is any tangible evidence that earnings are actually improving.
"Some may argue that economic data imply greater potential for recession and thus increase the risks for the stock market," says Michael Sherman at Shearson Lehman Hutton Inc. "But we argue that these risks are acceptable - even welcome if they result in lower inflation and interest rates.
"Although our profit forecasts are being lowered, we believe that stocks sell on earning power relative to interest rates, as well as on current earnings. Thus, we expect the equity market to rise in the months ahead, even given lower earnings expectations."
Edward Kirschner at PaineWebber Inc. contends that stock traders have actually been very discerning and discriminating in sorting out profit prospects of late - in particular by bidding for companies with an international bent.
Among individual stocks, he says, "there are a very few strong market leaders, trailed by many laggards. Among these winners, there is a common theme behind their outperformance: Earnings, earnings, earnings.
"The U.S. economy is still a tough environment in which to make a buck. Certainly, recent reports concerning housing starts, retail sales, industrial production and durable goods orders provide little evidence of a robust domestic economy.
"By comparison," Kirschner adds, "foreign economies are wonderful - they are growing much faster than the United States.
"We believe that the best place to find earnings is overseas, where growth is stronger and U.S. firms, backed by a tougher U.S. trade policy and changing foreign tastes, are gaining market share."
On a less sanguine note, Wein cautions, "I don't think we will see the combination of higher earnings and lower interest rates that would support much higher prices."