S&P 500 EPS Growth

Chart of the Week for July 22-28, 2005

The above chart shows year-over-year changes in the operating earnings per share (EPS) of the S&P 500 stocks as a group. The average annual EPS growth rate over the past 13-year period has been 7.3%. The last 13 quarters’ year-over-year growth rates have been higher. But the above-average growth rate has been declining, with a June quarter-end growth rate of 7.6%. While EPS growth has been slowing, it does not mean bad times are ahead for stocks.

Actually, steadier growth rates have correlated with favorable stock markets, and particularly for those stocks with growth characteristics. This is because more steady growth rates improve market sentiment and investor tolerance for higher priced growth characteristics.

With the US economy now in a steady growth phase— having passed through the recession of 2000–2001 and the recovery phase of 2003–2004— conditions favor steady growing companies typically falling in the classification of “growth” stock.

One cannot predict future economic or market conditions, much less which investment style will dominate over the near future, but one can consider the economic climate and relative valuation fundamentals. Many of those fundamentals, including the rate of change in EPS growth rates, point to opportunities in growth stock investments, particularly because of low relative valuations resulting from an unprecedented five-year preference for “value” stocks.

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