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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.

Curiously, as Savita Subramanian, head of US equity and quantitative strategy at Bank of America Merrill Lynch, reminded clients in a note published Monday, fourth-quarter earnings disappointments have been punished less than they have been historically. Unsurprisingly, though, technology stocks have been most heavily punished for any shortfall in earnings; certainly, the market's response to Apple's (NASDAQ:AAPL) modest decline in profitability may be overshadowing this broader trend.

Subramanian doesn't offer a hypothesis for this trend, but there are several reasonable possibilities: The economic backdrop appears to many more stable and perhaps even improving slightly. S&P 500 stocks still trade, on average, below the historic average of about 15 times earnings; in spite of the market's big gains throughout January, many investors may well view stocks as being reasonably valued and more prone to see "disappointing" companies as offering some upside potential.

Subramanian also points out that the cyclical parts of the market are doing better than the defensive ones. Technology, energy and financial stocks have provided the largest "beats" on both earnings and revenue, and all six cyclical sectors of the S&P 500 have seen their earnings outlook lifted since the reporting season began. That, Subramanian suggests, means multinational stocks are the best place for investors to place their bets for 2013.

With more than 120 of the S&P 500 companies left to report their fourth quarter results as of Wednesday night, there is still plenty of room for disappointments, larger-than-expected losses and certainly for a change in the market's psychology that would prompt a selloff of some kind. But in that event, it's important to remember that an earnings release simply confirms what has already happened. What matters more is what a CEO or chief financial officer has to say in the ritual conference call with analysts. That's where you'll learn whether what triggered a disappointing earnings release was an anomaly or the beginning of a worrying new trend.

In the absence of 20-20 foresight, sometimes prudent reactions to earnings news can boil down to reading between the lines in these conference calls and grasping the nuances of what management says, or fails to say, about the company's prospects.

Editor's Note: This article by Suzanne McGee originally appeared on The Fiscal Times.

For more from The Fiscal Times:

5 Stocks That Analysts Hate Right Now

S&P 500 Seems to Have Few Hurdles Ahead

Four Tech Stocks Every Investor Should Consider Owning

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