U.S. profit growth seen down in mid-single digits

By Caroline Valetkevitch

NEW YORK (Reuters) - Investors hope the Federal Reserve will be successful in engineering a mild slowdown for the U.S. economy through 2007, but Wall Street may have to brace itself for less-than-stellar profits if the downturn proves sharper than expected.

Corporate earnings growth could fall to the mid-single-digit range next year after more than four years of double-digit gains, some leading money managers who spoke at the Reuters Investment Outlook 2007 Summit in New York this week said.

With the slowdown in housing yet to fully play out, any sign that economic growth has paused for a big downturn could keep investors on edge. The Fed on Tuesday left benchmark interest rates unchanged for a fourth straight meeting, as expected, while taking note of the scope of the housing downturn.

"I think profits will look much more like 5 to 6 percent than anything with a teenager ring to it," said Bob Morris, partner and chief investment officer of Lord Abbett & Co. LLC in Jersey City, New Jersey.

"At this point, it becomes a revenue game. What is a plausible revenue growth number? Based on our economic forecast, we think we're going to get between 2 to 2.5 percent revenue growth," he said.

Robust profit growth has helped stocks put in a strong performance this year, with the Standard & Poor's 500 index .SPX up more than 13 percent year-to-date.

Meanwhile, a UCLA Anderson Forecast report released last week projected the U.S. economy will expand at a weak pace next year, with quarterly real gross domestic product growth no higher than 2.7 percent.

The bearish forecasts follow a 21.1 percent increase in S&P 500 company profits in the third quarter, according to Reuters Estimates. For the year, analysts forecast earnings growth of 14.4 percent, while the consensus estimate for 2007 growth is 10 percent, Reuters Estimates data shows.

"We think the consensus estimate for S&P 500 earnings growth next year is too high," said John Gould, executive vice president and portfolio manager at Schafer Cullen Capital Management in New York.

Gould, who said he sees earnings growth of 4 percent to 5 percent next year, said, "If you talk to companies especially in industrial or more cyclical areas of the economy, there's some caution in their statements ... There are other signs that other areas of the economy are cooling down."

On Tuesday, General Electric Co. (GE.N: Quote, Profile, Research, Stock Buzz), the second-largest U.S. company by market capitalization, gave a 2007 earnings outlook that trailed the average estimate of Wall Street analysts. However, the company's chief executive, Jeff Immelt, said on CNBC early Wednesday he did not believe the company was trying to signal a slowdown in global economic growth.

Other money managers at the Reuters Summit had a more bullish outlook for earnings.

Boston-based fund manager Margaret Patel said double-digit earnings growth could continue as companies capitalize on the benefits of recent mergers.

"I think we'll continue to see pretty good earnings growth ... We'll continue to see mergers of companies that will be synergistic. I think we'll see that as a source of earnings growth," the senior fund manager for Pioneer Investment Management said.

Mark McAllister, manager of Legg Mason Partners Investors Value Fund, said he doesn't see an economic recession on the horizon.  Continued...