Financial Watch

Earnings season for the first quarter of 2005 is drawing to a close with a quiet glow. The strength of the financial reports delivered so far has been rather amazing. The average Fortune 500 corporation is expected to report profit growth of nearly 16% from a year ago, which is double analyst expectations coming into earnings season. Analysts were expecting profit growth to slow to 8% in the most recent quarter due to slower economic growth in the U.S. economy and the absence of one-time catalysts to drive profits higher.

The ability of Corporate America to turn in strong quarterly profits in a less than ideal environment during the first quarter of 2005 should have sent a strong signal to Wall Street that the future is very bright. Yet until this week Wall Street has focused on the rare signs of weakness and put positive news on the backburner. The Dow Jones Industrial Index is down 4% on the year. Some analysts and investment advisors voice their concern over high valuations, but in fact valuations are currently below their long-term norm. The Fortune 500 currently has a trailing price/earnings ratio of 16. In comparison during the tech boom the stock market traded at 29 times earnings.

Investors are not the only ones waiting to benefit from the present economic cycle. Corporations are still sitting on massive piles of cash. As executives become more confident about long-term business prospects expect to see a pickup in merger and acquisition activity. With business valuations trading near their historical averages and the large amount of free capital available it is surprising more deals are not in the works. The current reluctance for corporate executives to commit to long-term projects bodes well for the future. To remain competitive, corporations must be ahead of their competition in developing cutting edge technology. The risk-averse environment we are presently moving through will eventually subside and provide the fuel for even stronger job creation and economic growth.