UNEDITED

This week concludes the peak of first quarter earnings season. After this week, investors will have digested earnings announcements for all but 20% of the S&P 500, most of which are retailers. As of last Friday, 55% of S&P 500 companies have reported first quarter earnings, of which 78% beat Wall Street estimates while 11% fell short of expectations. So far, the S&P 500 companies have posted year-over-year earnings growth of 26.3% with revenue growth of 12.5%. Additionally, companies are guiding estimates for the second quarter higher. Of the 83 S&P 500 companies that have updated second quarter guidance, 53% have indicated earnings would be higher than current estimates, while only 28% forecast not meeting analysts' projections. This is better than the year ago period and the previous quarter. Analysts have responded by increasing earnings growth estimates for the S&P 500 for the second quarter to 16.1% from 14.9% on April 1.

The rapid rise in steel prices has been a focus for investors. Several companies that use steel in their manufacturing have mentioned that they expect the price of steel to moderate and decline this summer. US Steel sees the market differently. In its earnings release it said, "Average second quarter realized prices are expected to improve significantly more than the $52 per ton average improvement in the first quarter." This continued strength stems from its view that demand remains strong. First quarter shipments increased 71% compared to the first quarter last year.

Copper prices have also been strong over the past several months. In its earnings announcement, Phelps Dodge noted that copper price averaged $1.231 per pound in the first quarter v. 76.0 cents last year and 93.5 cents per pound in the previous quarter. This was the most significant driver for Phelps Dodge's 63% jump in revenue. Of the $619 million increase from last year, $363 was due to higher prices, higher volumes accounted for $102 million. Copper sales increased by 16.7% from last year.

DuPont includes a geographic breakdown of its revenue and discloses the attribution of its sales which allows insight to the global economy. The company breaks down the percentage points of revenue growth by local price, currency effect, volume, and other. US revenue volumes increased 8% with 7% coming from volume and 1% from price. Volume growth was led by Asia Pacific with 14% and when combined with a 1% price increase and a 5% currency effect, total Asia Pacific revenues jumped 20%. European revenue also increased by 20%, but was primarily due to the currency effect which was 15%, volumes increased 5% and local price fell by 2%. The largest price increase was in the Canada & Latin America segment. Local price increased by 5% while volumes increased 7% and currency added 4%. The company also breaks down its segment sales. Every segment posted a double-digit increase in sales, led by Agriculture & Nutrition and the Electronic & Communication Technologies. Both of these segments increased sales by over 20%. Volumes increased the most in the Electronics segment (17%) and the US dollar pricing increased the most in Agriculture (11%). Burlington Northern also breaks out its segment revenue. Its agricultural segment posted the strongest growth, up 22%. Its industrial segment revenue increase 10%, while consumer grew 9%. Its automotive business actually experienced a decline of 7% compared to last year

There are some pockets of weakness. Interestingly, the most notable area has been in home décor and home furnishing. Pier One Imports reduced its guidance for the Month ending May 1. Instead of the 3% to 5% gain in same store sales, the home décor retailer, now expects same store sales to be flat to down 2%. In the press release, Marvin J. Girouard, Chairman and CEO, said, "After a strong start to the month, sales in April slowed after the Easter weekend and customer traffic has been soft in the two weeks that followed." Haverty's Furniture also commented that sales have started to weaken over the past couple weeks. Haverty's is also borrowing a page form the department stores and moving toward more private label merchandise. The retailer also said that it is resisting price increases that manufactures are trying to push through due to raw material price increases. The company said that there is enough competition from imports that if a domestic manufacturer raises prices on a particular collection, they will just drop the collection and find another. During the conference call, "I think there are going to be some price increases clearly because the raw materials are up but I think that the pressure from the imports will help hold that down."

One of those domestic manufactures, Furniture Brands, also announced earnings this week. It also said that it expects second quarter sales growth to decelerate from the first quarter. Orders in the first quarter were up 8% compared to last year. This was partly due to the 7% drop experienced last year due to increased geopolitical risk. The company expects sales growth to be in the 4% to 5% range in the second quarter. Furniture Bands also commented that it sees strength in the upper-end brand names, which furniture retailers have also noticed.

The hotel industry started to rebound. Host Marriot reported that RevPAR (Revenue Per Available Room) increased 3.0% during the first quarter. This was driven mostly by an increase in occupancy, and only marginally by higher prices. The company did say it is seeing the mix shift from discount business to higher-rated business for the first time since 2000. During its conference call Chris Nassetta, chairman and CEO, said, "The outlook for the lodging industry has brightened considerably over the last few months." This led the company to increase its guidance for 2004. Instead of the 3% to 4% increase previously articulated, it now expects RevPAR to increase by 4% to 6%.

Companies have reported stellar earnings over the past three quarters that were on average 8.5% higher than analysts' estimates. While the S&P 500 had its strongest year since 1997 last year, it has stalled this year even as earnings for the fourth quarter and now the first quarter are way ahead of expectations. If better than expected earnings have not been able to cause the market to rally, the market looks precarious. Not only are investors bracing for higher interest rates, but the flood of stimulus that hit the economy last year is ending and being replaced with higher energy costs. The economy and corporate earnings have been on a torrid pace. Clearly it is unsustainable and it appears investors are starting to realize that 20% earnings growth will not continue for the rest of the year.