Investors are now focusing on the second-quarter earnings reports as a test of whether stock price gains since the March lows reflect fundamental reality.

Of the 101 US companies that have reported second-quarter earnings so far, 63.4% have beaten analysts’ earnings expectations. According to Bespoke, this is 1.4% better than last quarter’s 62% “beat rate”. It looks as if this earnings season will be only the second quarter-over-quarter increase in the “beat rate” since the third quarter of 2006. “As long as analysts remain behind the curve, and companies exceed expectations, stocks will have a solid foundation to build on,” said Bespoke.

Also, the percentage of companies raising guidance minus those lowering guidance is stacking up impressively. “At +4%, this would be the first quarter that more companies have raised guidance than lowered guidance since Q2 2008, and the best reading since Q1 2006,” said Bespoke.

The graph below from Barclays Capital (via US Global Funds – Weekly Investor Alert) shows that, based on data from the recessions since the 1870s, the stock market bottomed, on average, six months before the average upturn in trailing 12-month earnings per share. If the March stock market low marked a bottom, the historical data suggest trailing 12-month earnings should bottom in the current quarter. I guess we’ll soon find out.


Source: US Global Funds – Weekly Investor Alert, July 17, 2009.

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