S&P 500 Earnings

Quarterly "operating" net per share made a recession bottom
of $9.02 at Q2 2001. Since then, quarterly net has progressed
sharply and fairly evenly to an apparent interim cyclical
peak of $23.03 for Q3 2006. That translates to about 16.5%
annual growth off the trough -- impressive.

Over this period, companies saw profit margins widen as unit
sales growth outpaced unit cost growth reflecting rising
productivity, modest compensation increases, lower interest
costs and translation gains from a weaker dollar. In addition,
energy and industrial materials companies generated large
inventory profits as pricing rose strongly in these categories.
Finally, US companies saw profits from foreign subs and
affiliates rise sharply in the context of strong international
economic growth.

It appears profits fell in Q4 and projections indicate that no
major upside breakout in quarterly net can be expected until
Q4 2007, when operating net is seen rising above $25. Recently,
a slowing economy has cut yr/yr sales growth from a peak
level of 9.5% down to about 5.5%. Wage growth has picked up
and productivity gains have decelerated noticeably. This means
an increasing number of companies are experiencing profit margin
erosion. Moreover, oil and gas prices are well below peaks
and sensitive materials prices have been on a plateau. These
developments eliminate the vast bulk of inventory profits.
Note also that funding costs are up for non-financials and that
dollar translation gains have narrowed. On the plus side,
foreign ops continue strong.

The financial services sector has also been a strong performer
during the current expansion, with revenues growing 10 - 12%.
It was only Q4 2006 when there was some slight slippage.

This is not the most congenial environment for investment
managers. The US economic slowdown has brought pressure on
company profit margins and analysts are not expecting a strong
lift to earnings until late in the year. Managers also know
that a sluggish economy and a smaller trade deficit may also
herald slower business conditions in foreign markets. If it
was a sold out stock market, there would be little edginess.
But the market is only modestly below fair value, so managers
should not be sanguine.

It appears that to get operating net up from the Q4 2006 level
of about $21.50 to over $25 by late '07 / early '08, the
economy will need to strengthen appreciably, and this may
imply that Fed easing is also part of the expectations game
plan. On the plus side, note that the leading economic indicators
are starting to firm up.

Viewed long term, a rise in quarterly operating net above $25.
by late 2007 would signal the advent of the arrival of the
cyclical earnings peaking process which could carry over into
2008, but which would put me on notice as well as some other
old hands. A goodly volume of water will flow 'neath the
bridge before then, but at that time, it will be critical on
this hypothetical to look at the balance between economic
supply and demand.