Earnings Get An Added Lift

Stronger demand is driving profit gains

Corporate earnings continue to surprise. BusinessWeek's flash profit survey of 78 early-filing companies shows second-quarter income from continuing operations before extraordinary items rose 46% vs. a year earlier. The gain, however, was skewed by drugmaker Pfizer Inc., which swung to a $2.8 billion profit from a $3.7 billion year-ago loss, brought on by a special charge. Remove Pfizer, and flash profits rose by 23%. Not bad, given that analysts surveyed by Thomson First Call had predicted at the start of the quarter that profits from continuing operations in the Standard & Poor's 500-stock index -- which excludes special items in addition to extraordinary items -- would climb by just 14.9%.

The continued acceleration in sales growth gave profits the added lift. Revenues of early filers rose 12%, the third double-digit increase in a row. Economists say better demand and pricing power are driving the gains. Combine that with a continued zeal for holding down costs, says Richard D. Rippe, chief economist at Prudential Equity Group LLC, "and you have a great mix for profits."

Leading the pack was the tech sector. Among the standouts: Apple Computer Inc. (AAPL ), whose profits surged 221%. Financial firms did well, too. While one-time charges for legal settlements hit profits at Citigroup (C ), they soared elsewhere. Morgan Stanley (MWD ) led the way with a 104% gain. And thanks mostly to their finance arms, U.S. carmakers scored, as well. Ford Motor Co.'s profits rose 173%.

Rising rates could slow things somewhat in the third quarter, although economists still forecast robust profits. Most businesses can live with that.

By Robert Berner in Chicago

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