2006 Earnings Estimates Rising

The reason for rally will become apparent at some stage, but there are some clues in the earnings trend. Analyst now are busy raising estimates.If you have noticed some of the best moves are happening in stocks with good earnings.

Earnings season is wrapping up and the bulls have reason to cheer. Since third quarter reporting began over a months ago, the last of the market’s bearishness has faded and a new wave of buying has taken its place. Whether or not the rally is justified can be discussed in another piece, but one thing does stand; favorable third-quarter earnings reports have continued to stoke investor expectations. Over 92% of the S&P 500 companies have reported and positive EPS surprises outnumber negatives by better than 3:1. The median surprise is an impressive 3.3% and median growth thus far is 12.7%.

Looking ahead to next year, the revisions ratio has continued its uptrend and remains above 1.0, at 1.21. This is 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.