R.I.P., Double-Digit Earnings Growth

Standard & Poor's says the 18-quarter winning streak of 10%-plus profit gains for the S&P 500 has passed away peacefully

Here's a funeral oration that may bring a small tear to the eye of Wall Street pro and individual investor alike. "Today we lay to rest our friend Mr. Double Digit. He was a steadfast ally of investors for a number of years, and perhaps it can be said that we took him for granted as he continued his winning ways. True, he enjoyed robust health up to the very end of his life. But alas, today he goes to his final rest after 18 consecutive quarters of reliably exceeding that magical 10% figure we seem to fixate on. He'll always hold two places in our hearts."

Indeed, after much debate as to whether profit growth for the S&P 500-stock index could squeeze out one more quarter above the 10% line (see BusinessWeek.com, 2/1/07, "Will Profits Snap Their Hot Streak?"), the verdict is in. Standard & Poor's said on Apr. 3 that fourth-quarter 2006 operating earnings for the index increased 8.9% over the fourth quarter of 2005, marking the first time that the index has failed to post double-digit earnings growth since the first quarter of 2002. For all of 2006, the index posted a 14.7% gain, compared to a 13.0% gain in 2005.

"The decline had been expected in the second quarter [of 2006], but consumer spending, energy profits, and a strong economy kept it going," says Howard Silverblatt, S&P senior index analyst. "The fourth quarter, however, reflected the impact of a slower economy, difficulties in the automotive and homebuilding market, and strong holiday price competition in the electronic retail group."

"Close to a Perfect Landing"

In terms of aggregate dollars, both operating and as-reported earnings posted their second-highest earnings for a quarter at $197 billion (vs. the record $207 billion in the 2006 third quarter) and $182 billion (vs. the record $193 billion in the 2006 third quarter), respectively. For the year, both operating and as-reported earnings signaled their highest annual aggregates with operating posting $790 billion (vs. $694 billion for 2005) and as-reported posting $734 billion (vs. $634 billion in 2005).

Sector performance varied significantly during the fourth quarter. Materials surged 47%, partially due to a depressed comparison from the year-earlier quarter, while energy, with lower oil prices and tougher comparisons to year-earlier earnings, reported a 5.8% decline. For the year, all 10 S&P 500 sectors were positive, with seven reporting double-digit gains. Information technology, whose earnings were down in both the second (–2.66%) and fourth quarters (–2.80%), reported a 1.3% gain for the year.

But the focus inevitably returns to the interrupted winning streak. "Given that the four and a half years of growth were the longest in index history, positive single-digit gains are probably as close to a perfect landing as we were going to get," says Silverblatt.

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