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An 18-quarter run of double-digit earnings growth came to an end in the fourth quarter of 2006, thanks to tough year-over-year comparisons in energy, information technology, and health care.

But looking ahead, Standard & Poor’s projects the strongest operating earnings growth in 2007 will come from telecommunications (26.7%), information technology (17.2%), and health care (16.5%). We currently have an overweight recommendation on health care and marketweights on information technology and telecommunications.

During the fourth quarter of 2006, operating earnings for the S&P 500 increased 8.9% to $21.99 per share compared with fourth quarter 2005′s operating per-share earnings of $20.19, the first single-digit increase since the first quarter of 2002. For the year, the “500″ posted record earnings of $87.72 versus $76.45 for 2005, or a 14.7% gain compared with a 13.0% gain in 2005.

Given that the four and half years of double-digit growth were the longest in index history, we think positive single-digit gains are probably as close to a perfect landing as we were going to get.

A deceleration had been expected in the second quarter, but consumer spending, energy profits, and a strong economy kept it going. We think the slowdown in the fourth quarter reflected the impact of a slower economy, difficulties in the automotive and home building market, and strong holiday price competition in the electronic retail group. We found S&P 500 sector-specific operating earnings performance varied significantly.

Materials earnings surged 47% for the quarter, partially due to a depressed fourth quarter 2005 comparison, followed by a 41% increase for telecommunications and a 25% gain for financials. Energy companies, hurt by lower oil prices and a banner fourth quarter of 2005, reported a 5.8% decline. Information technology’s profit fell 2.8%, while health care’s slipped 0.1%. For the year, all 10 sectors were positive, with seven reporting double-digit gains.

S&P projects that double-digit quarterly operating earnings growth for the S&P 500 won’t return until the fourth-quarter of 2007. We predict growth of 14.6% on strength in telecommunications (29.9%); health care (28.8%); information technology (25.4%); and consumer discretionary (22.1%).


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