A profit gusher (cont.)

That said, the prosperity has been anything but uniform. Just three sectors, accounting for 40% of Fortune 500 sales - energy, financial services, and consumer staples - gobbled up almost 80% of the increase in profits since 2000. The doubling of oil prices from $35 a barrel in 2004 to more than $70 in mid-2006 made Exxon Mobil (Charts) the biggest moneymaker in Fortune 500 history, with $39.5 billion in earnings. But overall the energy windfall was a wash: The gaudy oil profits were extracted from the bottom lines of automakers, airlines, homebuilders, and plastics manufacturers.

In consumer staples the gains after 2000 stem from strong productivity growth and a consumer spending spree that persists to this day. Coca-Cola (Charts) and Pepsi's (Charts) earnings rocketed upward by 134% and 156%, respectively, while P&G's leaped 149%. (Check consumer products stocks.)

But the biggest jump - $131 billion - came in financial services. Five securities firms, Merrill Lynch (Charts), Morgan Stanley (Charts), Goldman Sachs, Lehman Bros., and Bear Stearns, more than doubled earnings to $31 billion, minting cash from proprietary trading, where they make huge bets on stock and bond prices with their own capital. (Check financial services stocks.)

Even more astonishing were the insurers. Property and casualty companies, a group that includes State Farm, Chubb (Charts), and Travelers, tripled their profits to $65 billion in the past six years. The comeback started after 2001, when claims for asbestos and medical malpractice rocked the big players, and 9/11 raised fears of more terrorist attacks. The insurers responded by raising their rates even as claims began to drop, thanks to tort reform in a number of states. So the insurers prospered despite the damage wrought by Katrina and other hurricanes in 2005.

In 2006 the skies turned clear: The insurers boosted their rates as much as 100% for catastrophe insurance on the coasts yet experienced few damaging storms. As a result their returns soared. (For all the unlikely winners, there was one big loser: tech. The champion of the last boom endured an earnings decline of 14% since 2000. See tech stocks. )

Sad to say, the historic rise won't continue. In fact, we're at a turning point. Wages are now increasing faster than revenues, and productivity growth is whisker-thin. Profit margins are beginning to shrink, and companies will probably ramp up their dormant capital spending. They need an infusion of plants and equipment for two reasons. First, only by adding to their depleted stock of tech equipment can they raise productivity and keep margins healthy. Second, they need to invest in new plants - something they've been neglecting - to drive growth. As their cash hoards decline, they'll need to borrow heavily again. Indeed, corporate borrowing and bond issuance are already rising steeply.

The extra borrowing will raise interest costs, and the heavy capital investment will boost depreciation expenses. With unemployment at just 4.4%, labor will take a far bigger share of productivity increases as companies vie for skilled workers. A surge in capital investment will help tech, while problems in the housing market will depress earnings growth for lenders.

The best guess is that profits will grow slightly less fast than GDP for the next several years, or in the mid-single digits. That's not bad considering the lofty peak we're starting from. And it will keep margins well above average for years to come. The gusher may recede a bit, but the well is far from dry.  

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