Commentary; Posted: 3/9/05
S&P 500 companies report 4th quarter rise
Dave Purdy
Guest columnist
When investing, as with driving, there are good reasons why windshields are big and rear view mirrors are small.
The fourth quarter earnings season has drawn to a close with just about all S&P 500 companies reporting in. As I expected and am happy to report, fourth quarter earnings were strong and, yet again, well above ìWall Street consensusî analyst expectations.
According to Standard & Poorís, S&P 500 operating earnings per share rose 8.3 percent from the third to the fourth quarter and rose 22.9 percent compared to the fourth quarter of 2003.
The consensus expected this earnings growth measure to be 15.5 percent at the start of the fourth quarter. Operating earnings per share for all of 2004 rose 24.4 percent compared with 2003.
The earnings levels were staggeringóoperating earnings were $633 billion for the year, up 30 percent from the previous peak of $487 billion in 2000.
But enough of looking back at 2004.
When investing, as with driving, there are good reasons why windshields are big and rear view mirrors are smallówe need to look forward. Recent developments are mixed. On the negative side, crude oil prices have shot back up again to the mid $50s price range.
This drains consumer incomes (yours and mine) on higher gasoline and heating prices and raises costs for companies. That said, I do not see oil prices as slowing the economy or company earnings dramatically.
In 2004 oil rose from $32 at the beginning of the year to a $55 peak in October before closing the year at about $42. That rise did not have a major discernible impact on profits or real personal income, so I suspect we can weather this rebound.
Another negative is higher interest rates. Yes, the Federal Reserve has raised rates and I think they will continue to raise rates, but I do not see them harming the economy. They call the pace of rate hikes ìmeasuredî and I agreeórates are rising a bit faster than the lift in inflation, representing a careful, responsible tightening action. Some are worried about the weak dollar, but I see that as providing opportunities for U.S. exporting and import competing companies.
Some worry about rising inflation, but the rise has been modest - the core (excluding food and energy) CPI inflation rate has only risen 1 percent from its 2002 low to 2.2 percent currently.
I am actually still watching deflation problems in one major sector - Technology. There, many companies are still competing by cutting prices so earnings have been weak despite higher sales.
I continue to believe that the U.S. economy will experience another solid year with GDP growth around 4 percent, inflation and interest rates somewhat higher and company earnings also higher.
Early indications look good. Employment is up 394,000 for the first two months of the year. Chain store sales are up 9.5 percent and plant and equipment sales are up 2.6 percent.
At this point the Wall Street consensus is forecasting less than 10 percent earnings growth for 2005. I think they will be wrong again and that earnings will rise in the 12-18 percent range. If so, there is reason to expect the current pause in equity markets will end and the advance may resume. I will be watching the statistics and indicators as we go along and report important developments.
Writer David Purdy is president of Wealth Management Midwest, Forest Lake, and offers securities through Linsco/Private Ledger, Member NASD/SIPC and an investment advisor.
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