The Little Engine That Could

September 26, 2006

S&P 500 posts its eighteenth consecutive quarter of double-digit earnings, as growth spreads beyond the energy patch.

Throughout the year, Standard and Poor's (S&P) has warned investors that the S&P 500's record-breaking streak of double-digit earnings growth would soon come to an end.  Eventually, it warned, the law of big numbers would catch up with the index, and as the economy cooled, year-over-year growth would slip into the single digits.

Not so fast.

S&P now expects the S&P 500 to post its eighteenth consecutive quarter of double-digit year-over-year earnings growth in Q3, with companies delivering profits 14.3 percent higher than in the third quarter of 2005.  Moreover, it expects the good times to keep on rolling right through the fourth quarter, and possibly, into 2007.

"We think the effects of a projected weakening rate of GDP growth, relatively high energy prices and 17 consecutive interest rate increases will be more than offset by the benefits accruing from still favorable business conditions and near record corporate profit margins and cash balances," says Sam Stovall, Chief Investment Strategist of S&P's Equity Research Services.

One impressive feature of the third quarter is that the strong growth extends over the majority sectors, with six of ten sectors posting double-digit growth. Interestingly, those growth rates shift in the fourth quarter: hot sectors like Consumer Discretionary go cold, while cold sectors like Telecommunications get very, very hot.  In the end, however, growth remains above the magical 10 percent mark.

SECTOR

Q3 Growth

Q4 Growth

Consumer Discretionary

23.4%

-0.5%

 

Consumer Staples

2.9%

4.5%

 

Energy

27%

9.4%

 

Financials

17.9%

19.2%

 

Health Care

6.8%

6.4%

 

Industrials

9.7%

12.7%

 

Information Technology

-2.3%

0.2%

 

Materials

41.2%

42.2%

 

Telecommunications Services

14.4%

57.5%

 

Utilities

15.1%

3.3%

 

TOTAL

14.3%

10.7%

 

One of the reasons driving the strength of the S&P's earnings growth is that two of the largest sectors in the index on an earnings basis are performing extraordinarily well.  Together, Energy and Financials will contribute over 42 percent of the index's total earnings this year, and both those areas are posting very strong growth on a year-over-year basis. In particular, the Financials sector - the largest single factor in the S&P earnings picture - is posting growth rates of nearly 20 percent.

SECTOR

% of Estimated 2006 Operating Earnings

Consumer Discretionary

8.4%

Consumer Staples

8.0%

Energy

15.6%

Financials

26.9%

Health Care

10.3%

Industrials

10.3%

Information Technology

10.5%

Materials

3.4%

Telecommunications Services

3.1%

Utilities

3.4%

 

 

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