The bulk of corporate earnings results for the second quarter of 2003 from S&P500 companies are now in and equity bulls are claiming that they justify the sharp equity rally since mid-March. I'm not convinced. More companies beat analysts' expectations, but then estimates had been revised down sharply.
The reality is that the 9% year-on-year rise in second-quarter earnings is actually less than that in the first quarter. And much of that was accounted for by cost-cutting and currency gains rather than top-line sales growth. Most important, the financial sector accounted for over 40% of the earnings growth surprise. The stark truth is that the rest of corporate America (ex-energy) generated less than one percentage point of reported earnings growth.
During the second quarter, falling interest rates were the key to profit growth. They encouraged households to refinance like crazy, generating record profits for financials, and gave consumers...
