(FORTUNE Magazine) – Following on the heels of 2003's spectacular comeback, America's largest corporations made it clear in 2004 that the recovery was for real. Heading into the year, the question was whether the post-recession earnings momentum could continue. There were plenty of potholes, including high oil prices, Iraq, and a presidential election.

Those concerns were blown away by a resurgent global economy, powered by the U.S. and China. By year-end FORTUNE 500 companies had raked in a record-breaking $8.2 trillion in revenues and $513.5 billion in profits. And for the second consecutive year, the big got much bigger: To nab the last spot on the FORTUNE 500, Cincinnati Financial had to sell $3.6 billion in insurance policies. That's 12% more than it took to make the list in 2003. Better still, the profit performance of the FORTUNE 500 was as widespread as it was impressive. Of the 42 industry groups tracked by FORTUNE, only electronics and electrical equipment, pharmaceuticals, telecommunications, and airlines failed to post profit growth. Everything else, from chemicals to apparel to securities to railroads to food and drink, had something to celebrate. "Businesses are in as good a shape as I've ever seen them," says Mark Zandi, chief economist at Economy.com.

In particular, the old economy looked positively frisky. If a company's business involved hauling stuff out of the ground--be it oil, copper, iron ore, or aluminum--the odds were good that it made big money. "Because of the very strong global growth, demand for commodities and energy soared," notes Zandi. Much of that demand came from China, which grew a sizzling 9%. The country's appetite for raw materials--it now consumes about a quarter of the world's copper, iron ore, and steel--sent commodity prices sky-high. And those price increases went straight to the bottom lines.

With oil prices on the rise, giants like Exxon Mobil (No. 2) and ChevronTexaco (6) also gushed profits. For the second straight year, Exxon Mobil powered its way to the top of the FORTUNE 500 profit charts in 2004, with a $25.3 billion earnings performance--smashing the record set by Ford in 1998. But as a group, metal producers shone brightest, posting the highest profit growth of all FORTUNE 500 sectors last year--a stunning 801% gain. Aluminum giant Alcoa (79), for instance, increased its profits by some 40%, to $1.3 billion. And copper miner Phelps Dodge (299) saw profits jump 11-fold.

In the U.S., even though the Fed raised the fund rate several times, long-term mortgage rates stayed low by historical standards. That kept the housing market happy. Homebuilders like Pulte (181), D.R. Horton (203), Centex (204), Lennar (214), and Toll Brothers (477; see separate story) all again posted double-digit gains in profits. Four new homebuilders joined the list. Also reaping the benefits were home-improvement retailers Home Depot (13) and Lowe's (43) as Americans continued to refinance, then added kitchens and great rooms galore.

At the other end of the profit spectrum, the weakest of the FORTUNE 500 got even weaker in 2004. The airline industry--plagued by the lethal combination of higher fuel costs and cutthroat fare competition--continued to hemorrhage money. The sector was by far the worst performing of the FORTUNE 500, landing dead last in profits and return on assets and second to last in return on revenues. Two of the six "legacy" carriers (those that predate the deregulation of the late 1970s), UAL Corp. (129, parent of United Air Lines) and US Airways Group (295), continued their struggle to emerge from bankruptcy. Delta Air Lines (138) lost $5.2 billion and hovered dangerously close to its own Chap- ter 11 filing. Rounding out the parade of money losers were AMR Corp. (119, American Airlines' parent), Continental Airlines (232), and Northwest Airlines (190). "I think it's fair to say that you'll continue to see more pain and more consolidation in this industry," says Anthony Chan, a senior economist at J.P. Morgan Asset Management.

For the telecom industry, 2004 was another year of pain and consolidation. Amid fierce price competition, AT&T (56) and MCI (90) both posted big losses. Those losses, in turn, have spurred a frenzy of dealmaking of late: SBC Communications (33) recently inked a deal to acquire AT&T, while industry leader Verizon (14) and its much smaller rival Qwest (154) are in a bidding war for control of MCI.

All told, however, FORTUNE 500 investors had reason to be pleased in 2004. The FORTUNE 500 index, which measures all the publicly traded members of the 500, produced a highly respectable total return to shareholders (as measured by the change in stock price plus dividend income) of 10.3% last year. As always, there were the extremes: The best performance came from bankrupt building-materials company Owens Corning (349), which posted a 1,019% return. Meanwhile, one of the biggest--and highest profile--disappointments was delivered by drug giant Merck (84), which was forced to withdraw its bestselling painkiller Vioxx from the market in September after a study linked the drug to an increased risk of heart attacks and strokes. Merck's stock plunged almost 30% and has yet to recover.

In many ways, it was the power of the individual that stood out in 2004: Leadership matters. Billionaire hedge fund investor Eddie Lampert, for example, made once-bankrupt retailer Kmart (113) one of the FORTUNE 500's stock market standouts. The company's shares soared 313% as investors cheered Lampert's strategy of closing unprofitable stores and making a killing on the underlying real estate. He then orchestrated a surprising deal to acquire Sears (45). Then there was Steve Jobs, the co-founder and CEO of Apple Computer (263), who has been credited with bringing innovative fervor back to Apple. One of the byproducts of that innovation is the wildly popular iPod portable digital music player. In 2004, investors who believed in Jobs were handsomely rewarded: Apple's profits tripled.

Still, for some other high-profile FORTUNE 500 CEOs, 2004 could only be described as an annus horribilis--both for the executives and for shareholders. Franklin Raines, former CEO of mortgage behemoth Fannie Mae (and once one of the most powerful business figures in Washington), was ousted from the company amid an ongoing accounting scandal that broke last autumn. Not only did the stock tank, but Fannie Mae, which last year ranked No. 20 on the FORTUNE 500, has also been booted off this year's list for failure to file up-to-date financials. The noose also tightened in 2004 around the neck of Carly Fiorina, the charismatic former CEO of Hewlett-Packard who had engineered the merger of computing heavyweights HP and Compaq to form the 11th-largest company in America. But as the company continued to generate worse than expected financial re- sults, it became more and more obvious that Fi- orina's merger was failing HP shareholders badly. And indeed, by early 2005, Fiorina was gone.

As it happens, one of the most influential figures in the FORTUNE 500 last year wasn't even a corporate type. New York State attorney general Eliot Spitzer filed a stunning lawsuit suit against Marsh & McLennan (176) last October, charging the world's largest insurance broker with rigging bids and collecting kickbacks from insurance companies. The fallout was swift and severe: Marsh chairman and CEO Jeffrey Greenberg got the boot, and by year-end the company's stock price had cratered by 30%. The Spitzer investigation also ensnared insurance giant AIG (9); last month the company's legendary CEO, Hank Greenberg (father of Jeffrey), was forced to step down, leaving investors unsettled about the company's future.

Outside the executive suite, the news was also generally good. The number of rank-and-file FORTUNE 500 employees swelled last year, reversing three straight years of job losses. The FORTUNE 500 employed some 24 million people in 2004, an increase of 306,045, or 1.3%. That was consistent with the U.S. economy, which created a net 2.2 million jobs in 2004, the largest increase since 1999. More than half of FORTUNE 500 companies added employees last year; retailers and service companies boosted their head count the most.

Some of the additions were due, no doubt, to mergers, such as J.P. Morgan's purchase of Chase, and Bank of America's acquisition of Fleet. These would therefore add no net new jobs for the economy. It's also worth noting that FORTUNE 500 companies have employees around the globe. And that raises the question, How many of those new jobs were added in the U.S.? We can't supply a definitive answer, since companies are not required to break out their U.S. and non-U.S. employment figures. But FORTUNE did analyze the data from 45 big companies that voluntarily provide this information; collectively, they account for about 20% of all FORTUNE 500 employment. The results were revealing: Foreign employment among the group increased by 9.6%, while U.S. employment rose by less than 1%. In fact, of the 45 companies we studied, 18--including Coca-Cola (92), Dell (28), General Motors (3), and ChevronTexaco--employ more people outside the U.S. than they do domestically.

"Companies are under intense competitive pressures to keep their costs under control, and from that perspective, they are continuing to outsource," says Nariman Behravesh, chief economist at research firm Global Insight. But that's not the whole story. Overseas job creation is strong because that is where the growth is, adds Behravesh: "So a lot of companies are locating production in Asia, specifically for the Asian market--not to reexport back to the U.S."

Although FORTUNE 500 companies continue to focus increasingly on opportunities outside the U.S., at least one big company bucked that trend last year. Media conglomerate News Corp. moved its corporate home from Australia to the U.S. and thus makes its debut (at No. 98) on the FORTUNE 500. The reason for the company's move: better access to U.S. capital. So yes, the FORTUNE 500 is going global--but there's still plenty of opportunity at home.

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