(FORTUNE Magazine) – Talk about a show of force. The FORTUNE 500 roared back to life in 2003, as the nation's largest companies smashed existing sales and earnings records, and obliterated the dismal, accounting-damaged performance of the past two years. Making the accomplishment even sweeter was the fact that few observers had expected it.

A sense of unease pervaded corporate America during the early weeks of 2003, as business decision-makers and investors alike fretted about the prospects of a looming war with Iraq. As we now know, many of those fears were erased in March, when a hailstorm of cruise missiles rained down on Baghdad and a decisive military victory for the U.S. appeared imminent. Corporate management teams across America breathed a sigh of relief and then embarked on their own show of force: By year-end FORTUNE 500 companies had raked in a record-breaking $7.5 trillion in revenues and $445.6 billion in profits. Even investors were finally rewarded. After a brutal three-year bear market, the FORTUNE 500 stock index zoomed ahead by an impressive 27%.

Of course, it wasn't just military victory in Iraq that accounted for the stellar performance of the FORTUNE 500 last year. Another battle--this one aimed at revitalizing the flagging U.S. economy--had already been playing out at home. In this particular war the weapons of choice were rock-bottom interest rates (driven down by the Federal Reserve to the lowest levels in four decades) and the Bush administration's tax cuts and spending increases, all aimed at encouraging consumers and businesses to spend like never before. "You had both policy guns firing powerfully and simultaneously," says John Lipsky, chief economist at J.P. Morgan. "Never in our modern history had there been a combination of fiscal and monetary stimulus on the scale that we were seeing." By the second half of 2003 that combination began to pay big dividends: Quarterly GDP grew at the fastest pace in two decades, while corporate profits as a percentage of GDP reached record levels.

Even better, the corporate profit recovery was as widespread as it was spectacular. Of the 39 industry groups tracked by FORTUNE, all but five posted profit growth in 2003. Among the many winners, the petroleum sector led the way, as refiners like Exxon Mobil, ChevronTexaco, and ConocoPhillips reaped the benefits of oil prices that hit $30 a barrel before the Iraq war and (to the surprise of many industry watchers) remained high long after the heavy fighting ended. It also didn't hurt that economies around the globe were starting to pick up steam, boosting the worldwide demand for energy. Against that backdrop, Exxon Mobil powered its way to the top of the FORTUNE 500 profit charts in 2003, with a $21.5 billion earnings performance that came within a whisper of breaking the record set by Ford in 1998.

Consumers, for their part, continued to feed their ravenous appetites and played a crucial role in propelling FORTUNE 500 companies to new heights. Low interest rates helped sustain the red-hot housing market, as Americans took out some $3.8 trillion in real estate loans during 2003--about twice the amount forecast. Not surprisingly, one of the major beneficiaries was mortgage-financing behemoth Fannie Mae, which hauled in a record $7.9 billion in profits last year. (It may come as a surprise that Fannie's sibling company, Freddie Mac, is nowhere to be found on this year's list. The reason isn't that Freddie, No. 32 on the 2002 list, necessarily faltered; thanks to an accounting scandal that broke in 2003, the company's most up-to-date financials were unavailable.) Meanwhile homebuilders like Centex, Lennar, and D.R. Horton kept their construction crews working around the clock--and posted huge double-digit gains in both profits and revenues. And once those homes were built, their new occupants flocked to the aisles of home-improvement retailers Home Depot and Lowe's, both of which improved their own bottom lines considerably in 2003.

But it wasn't just consumers who were doing the spending. After more than two years of keeping a tight lid on their purchases, businesses finally began to loosen the purse strings in the latter half of 2003, spurred on largely by their own profit growth. "One of the big surprises of last year was how fast business capital spending reaccelerated, especially in the information technology sector," notes Lipsky. Among the big tech companies on the receiving end of that spending largesse were Microsoft, which boosted its profits to almost $10 billion, and IBM, which more than doubled its bottom line.

Even the rapid decline of the U.S. dollar worked to the advantage of many FORTUNE 500 companies. It may have been the bane of American tourists around the globe, but the falling greenback was definitely a boon for U.S. companies like Coca-Cola and General Electric, which have significant international operations. For starters, a lower dollar makes American products more price-competitive against the offerings of foreign companies both at home and abroad. What's more, profits earned in foreign currencies become larger after they are translated into U.S. dollars. Either way, multinationals typically experience an earnings boost when the dollar drops.

That's not to say that the news was all good for the FORTUNE 500 last year. Many pharmaceutical companies, for instance, looked downright sickly in 2003. As patents and exclusivity rights expired on such billion-dollar products as Claritin and Glucophage, major drug companies struggled (and largely failed) to come up with the next crop of blockbuster drugs. At the same time they faced intense competition from generics and increasingly vocal demands from consumer groups calling for price cuts. As a consequence, the profits of companies like Merck and Schering-Plough took a dive--as did their stock prices. Also forced to contend with the one-two punch of falling prices and increasing competition were two of the country's biggest telecommunications providers, AT&T and Verizon Communications. Investors were clearly unimpressed with the future earnings prospects of these two telecom giants, and both stocks slid in 2003.

But for the most part investors had reason to cheer. Only 37 companies in the FORTUNE 500 produced negative total returns to shareholders (as measured by the change in stock price plus dividend income) in 2003. Such widely held stocks as Comcast, Home Depot, and Citigroup racked up returns of 38% and higher. Former highflying technology and Internet stocks fared even better, as the shares of companies like Intel, Cisco Systems, and Amazon.com produced gains that far outstripped those of the broader index. "There's a real knee-jerk tendency for investors to turn back to the names that were working well in the last bubble," says Stuart Freeman, chief equity strategist at A.G. Edwards. But it was the companies with some of the shakiest finances that managed to line up some of the most impressive returns among the FORTUNE 500. After all, just lessening the threat of potential bankruptcy was enough to help triple the beaten-down stock of energy company Williams.

That said, many market watchers are predicting that 2004 will be the year that the bluest of blue chips among the FORTUNE 500--the big companies like General Electric, Procter & Gamble, and ConocoPhillips that crank out consistent earnings and pay steady dividends to their shareholders--will reign. And while the returns that such companies are expected to generate this year may not be as dramatic, we're willing to bet that most investors would gladly accept them.

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