updated 4/1/2004 2:48:37 PM ET 2004-04-01T19:48:37

Earnings scorecards for the first quarter of 2004 will start to land on Wall Street’s trading desks over the next few weeks, and they are likely to turn heads again this quarter. Overall financial results from America’s largest corporations are expected to show year-over-year growth of 20 percent, well above the long-term average for quarterly earnings.

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But despite the lofty outlook, this quarter some Wall Street analysts are wary.

It’s no secret that first-quarter earnings will be strong, they note. But while companies’ bottom lines are likely to be impressive, recording a third straight quarter of robust growth, of greater importance to Wall Street will be what firms say about top-line, or revenue growth, as it should indicate whether the economy is growing at a strong enough pace to produce solid job growth, an important ingredient in a sustained economic recovery according to Peter Dunay, chief market strategist at New York brokerage Wall Street Access.

“Given where we are in the economic recovery cycle, we really need companies to come out and say they’re seeing strong demand,” Dunay said.

American companies’ financial results have shown glimmers of revenue growth in the last few quarters, but for most part company profits have been buoyed by cost-cutting, which is a sign that corporate America has yet to see strong demand for its products and services, said Dunay. More of the same in the first quarter could mean bad news for Wall Street, he added.

“If companies are still cutting costs to grow their earnings at this stage of the economic recovery, when everyone is waiting to hear when the Federal Reserve will raise short-term interest rates again and slow down economic growth, we’re in trouble,” said Dunay.

The jobs issue is crucial. Wall Street is waiting anxiously for the release of the government's March payrolls report, which many investors hope will show decent jobs growth after three months of disappointing data. Persistent weakness in the labor market has raised questions about the sustainability of the U.S. economy's current rebound from recession.

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But looking through the revenue prism, the jobs picture remains murky.

Company revenue has accelerated along with overall earnings growth since the second quarter of 2003, but is likely to moderate this quarter, according to Joseph Cooper, a research analyst at Thomson.

Cooper expects to see overall revenue in the first quarter to grow by 9 percent, down slightly from 11 percent in the fourth quarter of 2003. Revenue growth is seen slipping to 7 percent in the second quarter, he added.

“Revenue has followed the earnings trend,” Cooper said. “We’d like to see it go higher, because earnings are higher, but at least it shows we have some top-line growth. I’m not sure if it’s strong enough yet to build great levels of hiring,” he added.

On the positive side of the ledger, earnings season is shaping up to be another strong one, with a consensus of analysts polled by earnings research firm Thomson First Call predicting results for companies in the Standard & Poor’s 500-stock index will rise by 16.9 percent, mostly driven by strength in the financial, technology, materials and commodities sectors.

Thomson research also shows that fewer nasty surprises are expected from companies this reporting season. Over the last few weeks, U.S. companies have delivered 1.6 earnings warnings for every positive profit announcement, which is below the historical average of 2.3 to 1, according to Cooper.

Another bullish sign: Estimates for earnings growth have risen steadily since the start of the quarter. They are normally trimmed by 3 percent by the time earnings reporting season begins.

“It’s going to be a good earnings season,” said Cooper. “The news flow leading into it has been good and that usually leads to some above average surprises.”

“When it’s all over we think earnings growth will be 20 percent and that will be the third quarter in a row that we’ve seen a 20 percent rise,” Cooper said. Such a result is good in a decelerating earnings environment, he added, especially given that the historical average for earnings growth is 7 percent.

But investors should enjoy the good times while they still can, Cooper notes. Earnings growth is expected to slow down in the latter half of this year, he said, as year-over-year comparisons get harder.

Earnings growth surged 21.3 percent in the third quarter of 2003 and 28.3 percent in the fourth quarter, reflecting the government’s massive tax-cut package and record-low interest rates, but the impact from those fiscal stimulants will wane later in 2004 and in 2005, Cooper said, potentially depressing corporate profitability.

Looking ahead, analysts expect to see 14.9 percent growth in second quarter, 11.8 percent growth in the third quarter and 13.1 percent in the final three months of the year, he said.

“What used to be tailwinds will turn into headwinds,” Copper explained. “The beneficial impact of a weaker U.S. dollar, which has buoyed company profits in recent quarters, will diminish as the year progresses. And the benefits from lower interest rates and the tax-cut stimulus are going to run out too,” he said.

Persistently high energy prices could also present a problem for profits this year, said Dunay.

“There have been such strong increases in energy costs this year they have been chewing up large chunks of company revenue, so there’s less money to spend on business investment and hiring employees,” Dunay said.

“It’s a cost that firms have no control over and it’s a killer,” he added.

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