It's time for that popular Wall Street game called "Guess Those Earnings."
Companies have closed the books on the second quarter and now Wall Street experts, economists and corporate executives are sharpening their pencils and scratching their heads as they ponder just how well -- or how poorly -- the past three months have gone.
But a strange thing is happening this time. There is an incredibly wide range of opinion on corporate earnings, even though the quarter has already ended and companies will start announcing profits in just a couple of weeks.
Usually, there is at least a weak consensus that earnings were either up, down or flat. Now, though, you could find someone with impressive credentials to argue just about any viewpoint.
Here's an example: Wall Street strategists -- folks in investment firms who ponder the larger meanings of economic trends -- believe second-quarter corporate profits were about 11 percent higher than they were in the first quarter of 1990.
But just down the hall from those strategists are the Wall Street analysts -- people who shadow companies on an individual basis. They think companies will earn 16 percent more in the second quarter than they did in the first, according to Institutional Brokers Estimate System, a service of the Washington-based Lynch Jones & Ryan brokerage house.
Either an 11 percent or a 16 percent gain would be perfectly all right as far as the stock market is concerned. Unfortunately, not only are these two groups of Wall Street forecasters unable to agree with one other, but they also seem unable to agree with other experts playing the same guessing game.
Argus Research Corp., for instance, believes second-quarter corporate profits will rise a scant 1.25 percent from first-quarter levels. "It's better than another drop," said James Solloway, chief economist for Argus, an investment research house in New York. But it's but not much to cheer about.
John Williams, a private economist whose American Business Econometrics has many corporate clients, is less optimistic. He believes second-quarter profits will decline 5.5 percent from the already-dismal levels recorded in the first quarter.
There's a lot at stake here, as anyone who witnessed the recent steep drop American Telephone & Telegraph Co.'s stock price can attest. The telecommunications giant confessed last week that its profits in the second quarter would not meet expectations. Investors quickly dished out swift punishment to AT&T's stock.
With stock prices as high as they are, the market doesn't have much patience with companies that dare to disappoint. And the difference between analysts' predictions of a 16 percent rise in earnings and other experts' forecasts of a 5 percent drop has the makings of a big disappointment.
Corporate profits have been under a lot of pressure since the end of last year. No matter who is doing the forecasting, there is a general agreement that second-quarter earnings this year will be lower than earnings recorded in the same quarter of 1989. Even so, an improvement in the recently ended quarter from the depressed level of the first quarter of 1990 would give Wall Street an emotional lift.
There are only two reasonable explanations for stock prices being as high as they are: Either corporate earnings will soon improve or interest rates will decline in the near future.
Because there is growing doubt that interest rates will decline soon, Wall Street is placing more responsibility on corporate profits to justify current stock prices. Solloway of Argus thinks the stock market "will probably be dragged lower" in the weeks ahead. "There isn't much going for it in the next month," he argued, predicting that interest rates will not decline and corporate profits will be weak.
Prudential-Bache Securities Inc., meanwhile, thinks it has found a pocket of economic strength. Claudia Mott, head of Pru-Bache's quantitative analysis department, predicted that profits of smaller capitalization companies could rise a stunning 25 percent in the second quarter. John Crudele is a columnist for the New York Post.