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Earnings Season Trends: So Far, Analysts Have Been Way Too Pessimistic


Market watchers have also noted that, tech stocks excluded, disappointments have not been punished as heavily as in previous years.

Even a "superstorm," it seems, was unable to dampen fourth-quarter profits to the extent that gloomy pundits had suggested in the closing weeks of 2012.

With the reporting season moving into the home stretch, the rate at which companies are reporting earnings that beat analysts' forecasts remains high. As of Tuesday, according to Thomson Reuters, 70% of the 353 companies to report earnings beat expectations, slightly better than the 65% average in the last four quarters and well above the long-term average of 62%.

Cisco Systems (NASDAQ:CSCO) was the latest blue chip to top analysts' consensus projections, earning $2.7 billion on $12.1 billion in sales for its fiscal second quarter. Companies that had been expected to add greater drag, like property and casualty insurers such as Chubb Corp. (NYSE:CB), have also fared better than analysts and investors had expected. That doesn't mean the results were worthy of fireworks, of course. But analysts now estimate that fourth-quarter earnings for the S&P 500 (INDEXSP..INX) grew at a rate of 5.3%, up from 1.9% as of the start of the season.

True, some of the companies still due to report their fourth-quarter results are in sectors where the disappointment rates have been higher, such as materials stocks (half of all companies have fallen short of expectations, and some 25% of the companies in the group have yet to report their results), the industrials sector and the consumer discretionary space.

Remember, though, that a positive surprise isn't the same thing as earnings growth, and it hasn't suddenly become easier for companies to post bottom-line growth. Indeed, many of those that have announced an increase in profits have done so in spite of the fact that revenues have stayed flat, fallen or risen only infinitesimally. There is reason to be confident that the third quarter did indeed mark the trough for earnings growth, but not to bet on a big rebound in that growth.

What useful insight can investors glean from all these percentages?

Firstly, it's increasingly clear what sectors are facing headwinds and which ones will benefit from tailwinds. Verizon Communications (NYSE:VZ) is struggling and has proved to be a drag on the telecom services group – but even without its dismal showing, the other companies in the small sector wouldn't have done much better. It may not matter much that another telecom business beats expectations when those expectations were for a double-digit decline in profitability. Meanwhile, the financials stocks clearly are doing far better than expected, although investors should keep a keen eye open for signs that the mortgage refinancing wave that has contributed to some of this surprising earnings growth may not last for long, and look for other businesses that will step in to replace it as a growth engine for banking profits.

Secondly, the wave of earnings reports provide a reminder to keep an eye open for positive earnings surprises that are combined with earnings growth (or at least, a turnaround or recovery) and some kind of better news on the revenue front as well. That trifecta is what is likely to prove most resilient in the coming quarters.
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