Tying the Record

S&P 500 operating earnings growth remains strong -- and S&P expects good profit gains to persist

By Joseph Lisanti

The string of good earnings quarters continues. With more than 80% of the companies in the S&P 500 having reported their latest profit results, the index appears to have achieved a year-over-year double-digit percentage gain in operating earnings for the 13th consecutive quarter.

As recently as last month, we thought that would be unlikely. The lucky 13 string matches the record set in the period that ended with the fourth quarter of 1995. As it stands now, our analysts' projections show a continuation of robust year-over-year operating earnings growth in every quarter through the end of 2006. If each of those quarters does, in fact, see a double-digit percentage gain, the string will be extended to 19 consecutive periods.

Behind the earnings numbers is what we consider a strong economy. The initial reading on second-quarter gross domestic product growth was 3.4%, down from the annual rate of 3.8% in the first quarter, as we expected. Equipment spending, residential investment, and nonresidential construction all posted stronger-than-expected growth rates. Growth was somewhat inhibited by weakness in inventories, but Standard & Poor's economist Beth Ann Bovino believes the inventory softness will result in a strong second half, with 4.5% growth expected in the third quarter.

Economic growth is boosting payroll employment, which rose by 207,000 jobs in July. That has some people worried about wages exerting upward pressure on inflation. We believe that the worries about higher prices are overblown.

In addition to strong economic growth and good corporate profits, we think that stocks will be aided by more generous dividend policies at many companies. In the first seven months of the year, Standard & Poor's Dividend Record logged 1,206 dividend increases from a universe of 7,000 companies. That's 13.6% more increases than in the same period last year and 24.2% better than in January through July of 2003.

We continue to believe that stocks will climb in the second half, and that they currently appear more attractive than alternatives.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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