S&P Outlook
By Journal of Indexes Staff

S&P 500 Stocks on Course to Set Operating Earnings Record

As yet another indicator of the United States ' peculiarly unbalanced economy in 2004, Standard & Poor's announced that the second quarter 2004 operating earnings for the S&P 500 is setting a new record. According to Standard & Poor's data, with 85% of the market value reported, the operating earnings are estimated to be $16.90 per share, easily surpassing the previous record of $15.87 set in the first quarter of this year.

If the trend continues through 2004, the S&P 500 would set a new record for annual operating earnings. The record operating earnings for the S&P 500 would produce a quarterly profit of $157 billion, representing a year-over-year gain of 31%. The As Reported (GAAP) EPS is near a record ¾ a $15.10 estimate versus the record $15.18.

What this means, in short, is that the majority of the fruits of the recent upturn of the economy and the stock market has gone into the (until recently empty) coffers of U.S. companies as stocks have fallen in 2004, thereby raising earnings per share to record levels. What the economy now awaits is for companies to have enough faith in the economy to start transferring some of those earnings into job creation.

"While the As Reported earnings may not be a record, the value is still in an impressive neighborhood," says Howard Silverblatt, Equity Market Analyst at Standard & Poor's. "These gains translate into reduced P/Es as compared to a few years ago. They are now in the normal range when measured against historical values."

Standard & Poor's data also shows that the variance between operating and As Reported earnings is within the acceptable range, which adds legitimacy to the reported values. Reported sales are running 11% ahead of last year, and margins again are improving.

"The lack of major write-offs over the last six quarters is as noticeable, and concerning, as were the prior large pro-forma variances of a few years ago," adds Silverblatt. "While the difference has increased this quarter, the cost of the nonoperating items appears low. Part of this is due to reporting and corporate governance; however, the lack of items also speaks to management's relative inactivity."

The S&P 500's sector margin breakdown is positive, but ranges are wide. Information Technology and Utilities are both showing strong margin gains, while Telecommunications is suffering a reduction. A wide range in sales changes are also noted, with Energy leading the way with a 33.5% gain quarter-over-quarter and Utilities posting a 4.0% increase.