The heavy falls in Wall Street share prices this week, triggered by fears over US corporate earnings, have had a severe effect on the Irish stock market. But analysts in Dublin still believe that the domestic market will grow strongly, driven by the strength of Irish corporate earnings.

So what has caused the recent hiatus which has seen major stock markets come 8 per cent off their high points of the year and the Dow Jones to fall to such an extent? And what is the outlook for the ISEQ?

Essentially, a sizeable portion of the Wall Street took the view that the crisis in the Far East economies and the resultant effect on American companies' profits and earnings has been understated, although the strength of the US dollar is another factor.

Most of the companies that make up the S&P 500 index have now reported their second-quarter results and, according to Boston research agency, these second-quarter earnings have only grown at an annual rate of 2.7 per cent.

The expectation is that earnings in the third quarter will rise by less than 7 per cent. At the beginning of the year, many analysts had expected 15 per cent plus growth by the end of the third quarter and this estimate was still as high as 10 per cent at the beginning of this month.

The bulls on Wall Street continued their spending spree in the belief that the problems in Asia might affect earnings in one quarter. But there is a growing realisation that those problems and their effect on US corporate earnings are more deep-seated and likely to last longer than many had expected. On that basis, Wall Street blue-chips were trading on ratings that could not be justified, said the bears who sold heavily this week.

But bulls remain optimistic and none more influential than Goldman Sachs's Abby Joseph Cohen, who insisted at the height of this week's selling that stocks are still undervalued. Ms Cohen's comments were seen as the main factor in reversing Tuesday's 300-point fall into Wednesday's 60-point gain.

The market may still need time to digest its 25 per cent to 35 per cent gains of the four months ahead of April, she said, and has overreacted to the potential threats posed by the Asian fiscal crisis, corporate earnings and inflation.

a less-than-subtle hint to Congress that US interest rates might have to rise to choke off inflation. There was also Mr Greenspan's repeated comment that stock markets are taking too optimistic a view about the growth in corporate earnings.

That latter worry seems to have been the trigger for last Tuesday's 3.4 per cent fall on Wall Street, with some investors believing that the market was taking too rosy a view of the impact of the crisis in the Far East on American corporare earnings. One thing seems certain: if Wall Street takes the view that the current correction has not gone far enough and US share prices fall further, then some of the optimistic ISEQ forecasts may have to be revised.

It was Mr Greenspan's comments about the "irrational exuberance" of stock markets that sent Wall Street into a short-term tailspin a few months ago. But as Mr Kelleher of Davy puts it: "Somewhat surprisingly, given his poor track record of late on equity market forecasting, this seems to have had a significant influence on markets."

The Mr Greenspan's comments were followed, however, by a number of high profile high-profile downgradings in the US and UK, Britain, which triggered widespread losses across the Irish market, particularly among the financials - which had led the charge - and some of the larger industrials like Smurfit, Waterford Wedgwood and Independent.

"The recent selling has simply brought the market to where it was five or six weeks ago, and our view has not changed that the ISEQ Index will reach 6000 6,000 by the end of the year," says NCB head of equities, Mr John Conroy. That view is echoed by other analysts and Davy's Robbie Kelleher has gone even further, stating, in Davy's weekly book that not only will the ISEQ reach 6000 6,000 by the end of this year, it will rise another 16 per cent-plus in 1999 to hit 7000.7,000.

Even with this week's losses, the Irish stock market has been one of the best performers in Europe over the past year. And despite the recent weakness which has seen the ISEQ fall from a 5,471 high in mid-July to close on 5,000 on Tuesday, it seems set to continue to be a top European performer. Analysts also agree that the phenomenal gains by the banks

which has seen both AIB and Bank of Ireland move well into double-digit share prices will continue to be the dominant feature of the market.

Financial shares have been the driving force behind the Irish market, with the ISEQ Financial Index up more than 40 per cent, while the industrial index, which covers all non-financial stocks, is up 18 per cent in the same period. That might seem like a serious underperformance by the industrial shares, but the industrial index has still risen broadly in line with the FTSE and Dow Jones indices in London and New York.

Looking ahead, Davy analyst Robbie Kelleher is confident about the future for Irish equities. Writing in Davy's weekly book, he stated: "We believe prospects for Irish equities remain exceptionally bright. Over the next number of years corporate earnings will continue to expand rapidly, reflecting the combined benefit of exposure to Europe's most rapidly-expanding economy and a proven management expertise to diversify outside of Ireland."

He adds that if the advent of the euro results in a narrowing of the earnings multiples between Ireland and continental European markets, then the ISEQ has the capacity to move above 7,000 by the end of 1999.

NCB's John Conroy is in broad agreement and adds that the Irish market will probably reach 6,000 by the end of the year without the assistance of any major surge in Wall Street or London. The Dublin market has risen at twice the rate of London and New York in the first seven months of the year.

"That has been because the rise of the Irish market has been results and earnings-driven and that pattern will continue," he states, adding that the bias towards financials will also be a continuing factor.

But the NCB view is that smaller capitalisation stocks may suffer disproportionately as investors adjust their portfolios ahead of the single currency, with a greater focus on the larger financial and industrial shares. Indeed, there is plenty of anecdotal evidence of Irish fund managers selling into the recent strength of the market, taking a tidy profit as well as reducing their weightings ahead of EMU.

And to put it bluntly, European investors will want to have CRH the third-biggest building materials company in Europe in their portfolio of stocks in that sector. But will they want successful, but comparatively small building materials stocks like Grafton and Heiton? The same is true in the case of the banks European investors might look as far as AIB and Bank of Ireland for an exposure to the booming Irish financial sector. But will they take the same shine to the likes of Anglo Irish, Irish Permanent or First Active?

Mr Conroy of NCB believes that the danger to the second-liners of the single currency may be overstated and that value will be a factor.

"There will also be a focus on small and medium-sized companies with a franchise in Ireland," he says. "There will be a reluctance to stampede out of Irish companies which are showing high growth," he adds.