Analyst rush to revise earnings estimates

Like a broken record I keep repeating look at the earnings to understand markets. Here is the latest update on earnings from Zacks.

The most important point in this analysis is :

Looking ahead to next year, the revisions ratio has finally pushed above 1.0, to 1.07. This ratio has been trending upward over the last few weeks and sits slightly above our last reported number, 0.96.

I consider this ratio to be extraordinarily important. With the economy slowing, housing in a free fall and the yield curve inverted, one can easily make an intellectually coherent case for a recession next year. However, there has never been a recession where earnings grow at anything close to a double-digit rate. This is the elephant in the room that must be explained by any recession predictor. There is no way that the expected growth rate will come down unless estimate cuts exceed estimate increases.

Expect the bears to spin this. The fact is the earnings are much stronger than the macro analyst and bearish TV pundits make it out to be. Some of them have no idea about how to interpret earnings trend and those following them blindly will be in for rude shock.

With over 59% of the S&P 500 reported, third-quarter earnings results thus far have been a positive surprise and show a clear win for the bulls. Median reported EPS growth sits is 12.3% and positive analyst surprises outnumber negatives by over 4:1. It seems that investor�s low expectations for third-quarter earnings reports have proven unfounded. Though there are still over 200 companies in the index left to report, it�s clear that the market�s recent run-up now has a leg to stand on.

So far, the growth leaders have been the Telecom and Industrial sectors. Telecom has only seen four of its 10 companies report, however, so the numbers are not very telling. On the other hand, over 70% of Industrials have reported, and the numbers have clearly boosted the sectors outlook. Positive surprises outnumber negatives in the sector by over 7:1 and the median surprise sits at an impressive 3.1%. Median reported third-quarter growth for both sectors has been 26.1% for Telecom and 21.7% for the Industrials.

The growth laggard at this point in the reporting season is Consumer Staples, with a median growth of 7.4%. This is more favorable than expected however, as the sector�s surprise ratio is over 5:1, with a median surprise of 2.5%. The two earnings surprise leaders for the sector were Estee Lauder (EL) and Supervalu (SVU). Food firms Conagra (CAG) and McCormick (MKC) also posted double-digit surprises.

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