Company Earnings Follow Strong Economic Expansion But some worry these profits represent a peak

EARNINGS and dividend reports are now pouring in from corporate America. And they are looking good, thanks to an expanding economy, higher consumer confidence, and an economic upturn in Europe that has helped export-oriented United States companies.

Barring a sharp slowdown in the economy, triggered by further increases in short-term interest rates, earnings and dividends are expected to increase throughout the remainder of 1994, experts say. Still, the Federal Reserve Board's effort to boost rates to slow the economy is expected to hold down the pace of gains later this year, the experts add.

``Profits are quite strong and they are the key to dividend gains,'' says Joseph Tigue, managing editor of ``The Outlook,'' an investment news letter published by Standard & Poor's Corporation. ``We're now expecting an increase in earnings gains [for 1994] on the S&P 500 of about 30 percent, before nonrecurring charges. That compares to gains last year of about 15 percent,'' Mr. Tigue says. Nonrecurring charges are one-time losses or other write-offs taken against net income.

Dividend's are also expected to be up throughout this year, Tigue says. S&P analysts say that dividends on the S&P 500 should rise about 7.5 percent during 1994, the best year for dividend gains since 1990, when they rose about 11.5 percent. First quarter dividends on the S&P 500 rose around 4.3 percent over the first quarter of 1993, Tigue says.

Many of the companies reporting in last week showed gains well above earlier expectations from stock analysts. High-tech companies fared particularly well. The upbeat news on earnings and dividends helped drive stock indexes higher in the latter part of last week. Thus, the Dow Jones industrial average shot up 53.83 points on Thursday. But the strong corporate earnings of just one company - IBM - accounted for about a fourth of the Dow's gain that day. For the week ending April 22, the Dow closed down at 3,648.68 points.

Among companies ringing in with solid earnings-dividend reports in recent days: Chrysler Corporation, General Dynamics Corporation, Mattel Inc., Pfizer Inc., Philip Morris Companies Inc.

Still, the higher earnings-dividend gains did not always translate into immediate increases in stock values. Chrysler, for instance, reported that it earned $939 million in the first quarter. Earnings per share rose to $2.55, up from $1.57 in the first quarter of 1993, before accounting charges. Yet, Chrysler's stock, instead of rising on news of the higher earnings, fell, reflecting investor concerns that higher interest rates could work against auto sales later this year.

A number of other companies considered ``economically sensitive'' also saw share prices drop, reflecting concerns about rates.

``Good as these higher earnings have been, there's a feeling on the part of many investors that they could represent the peak of the earnings gains this year,'' now that interest rates are going up, says Larry Wachtel, a vice president with Prudential Securities Inc. He sees the possibility of another rate hike in May.

Thus rates may be far more important for Wall Street than current earnings/dividend gains. Many market strategists see the market moving lower rather than higher, based on the Fed's continuing belt-tightening. Dennis Jarrett, senior vice president with Kidder, Peabody & Company, sees the Dow falling to the 3,200 to 3,400 point level in the weeks ahead; that would mean a potential drop of 20 percent from the market's high of 3,978.36 on Jan 31. He sees the S&P 500 falling to between 400 to 425 from its current range of around 450 points.

While the market could still turn up on a temporary basis, Mr. Jarrett says, there is a possibility that individual investors could begin to pull out of mutual funds in large numbers.

Two-thirds of the redemptions from mutual funds that occurred earlier this month, he notes, were from no-load funds; such funds tend to be heavily used by ``market timers'' and other sophisticated investment specialists.

Mr. Jarrett frets that individual investors, who tend to take action late in the redemption cycle, will now start to liquidate their mutual funds, thus helping to pull the market down.