Standard & Poor's reports that the double digit earnings growth for the S&P 500 Index came to an end in the 4th quarter of 2007. This break in double digit earnings growth follows 18-months (4.5 years) of S&P 500 companies reporting double digit growth in earnings. Earnings for the 4th quarter of 2007 increased 8.9% on a year of year basis compared to the 4th quarter 2005.
Source: Standard & Poor's
This break in double digit growth has potential implications on the type of companies that may outperform going forward. According to Richard Golod, Director, Global Investment Strategies for Van Kampen Investments, higher quality large cap stocks offer compelling value in this environment.
Against the current backdrop of higher interest rates and declining S&P 500 earnings growth rates, it would seem larger-cap stocks may outperform small-cap stocks in the near future, favoring sectors such as consumer staples, utilities, financials, and health care. If history is any guide, I believe the following factors support an overweight position in large-cap, high-quality stocks with predictable earnings (emphasis added):
- A decelerating earnings growth rate
- A flattening yield curve
- A wide valuation spread between large- and small-cap stocks
- Potentially higher market volatility and an increased equity risk premium
As detailed in S&P's release, two sectors saw a decrease in operating EPS: energy at -3.21% and consumer discretionary at -2.39%.
18 Consecutive Quarters of Double-Digit Earnings
Growth for the S&P 500 Comes to an End
Standard & Poor's
By: David Guarino, Communications and
Howard Silverblatt, Senior Index Analyst
April 3, 2007
Global Earnings Set to Surprise on the Upside
Van Kampen Investments
By: Richard Golod
Director, Global Investment Strategies