Stellar third-quarter results turning point for economy

By Matt Krantz
USA Today

After three dreadful years, there's proof that U.S. companies are roaring back.

About 90 percent of Standard & Poor's 500 companies have reported third-quarter earnings, and collectively they've turned in jaw-dropping 20.9 percent growth in operating earnings, excluding one-time items.

That gain — the sharpest since the economy peaked in early 2000 — helps justify the big rally in stocks this year and shows that years of painful cost cutting and layoffs, combined with a better economy, are paying off.

The third quarter apparently was no fluke, considering that top executives at both General Electric and IBM said yesterday that things are really getting better. Their remarks helped push major stock indexes close to new 2003 highs.

But while investors and executives may already be looking ahead to next year, the third quarter is likely to be what they look back to as a major turning point, says Stuart Freeman, strategist at A.G. Edwards.

Even analysts who closely watch earnings were caught off guard, because 60 percent of the companies beat expectations.

"The third quarter was a total blowout on the upside — beyond what even the bulls would have hoped for," says Charles Blood, strategist at Brown Bros. Harriman.

The rebound was broad, too. Eight of the 10 S&P industry sectors posted gains from last year.

If there's a downside, it's that investors now expect the stellar earnings to keep coming. Analysts are predicting 22.4 percent growth in the fourth quarter, says Thomson First Call. Ed Keon, strategist at Prudential, thinks earnings may be even stronger.

But it's unclear how investors will react when they realize those rates of growth can't continue.