Reported Earnings Growth

Below I calculate quarter over quarter earnings growth for each quarter of the year from 2003 to 2006. In the first quarter of 2003, the S&P 500 reported earnings were $11.92. The first quarter of 2004 saw the reported earnings of $15.18, so the first quarter of 2004 saw a growth of 27.3% from the same quarter previous year. The third and fourth quarter reported earnings of 2006 are estimates, and entire year 2006 reported earnings is also an estimate.

First Quarter Reported Earnings:
2003 - $11.92
2004 - $15.18 (Growth of 27.3%)
2005 - $16.95 (Growth of 11.6%)
2006 - $19.69 (Growth of 16.1%)

Second Quarter Reported Earnings:
2003 - $11.10
2004 - $15.25 (Growth of 37.3%)
2005 - $18.29 (Growth of 19.9%)
2006 - $20.11 (Growth of 9.9%)

Third Quarter Reported Earnings:
2003 - $12.56
2004 - $14.18 (Growth of 12.8%)
2005 - $17.39 (Growth of 22.6%)
2006 - $20.50 (Growth of 17.8%, estimate)

Fourth Quarter Reported Earnings:
2003 - $13.16
2004 - $13.94 (Growth of 5.9%)
2005 - $17.30 (Growth of 24.1%)
2006 - $19.30 (Growth of 11.5%, estimate)

Fiscal Year Total Reported Earnings:
2003 - $48.74
2004 - $58.55 (Growth of 20.1%)
2005 - $69.93 (Growth of 19.4%)
2006 - $79.60 (Growth of 13.8%, estimate)

As you can see from the calculations above the S&P 500 has been enjoying robust gains in the reported earnings for last 4 years now. The profit margins are at all time high and double-digit growth in earnings was normal during 2003-2006 timeframe.

It is unrealistic to think that this kind of growth will continue in the future. If an investor projects this kind of earnings growth in the future and invests accordingly, I believe this investor is setting himself or herself for a big disappointment.

I would think that the reported earnings will stay in the $80-$90 range for next couple of years. It will not surprise me if it dips below to $70 level, in a recession next year. I hope I am wrong.

All disclaimers apply.

Data Source: http://www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS