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Unexpected Earnings

Story Highlights:

  • Earnings season is in full swing, with about 62 S&P 500 companies reporting earnings thus far.
  • Firms are, as a whole, beating too-meager expectations.
  • Next quarter's numbers may pleasantly surprise even more when compared to the prior year's post-Lehman crisis earnings numbers.
  • Expect positive earnings results to continue giving more evidence of a recovering economy.

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Unexpected surprises aren't always pleasant. Parking tickets, for example, are usually unexpected and unpleasant. But that's not the case with this year's earnings season—Q3 2009 earnings reports have so far largely been an unexpected (pleasant) surprise. With 62 S&P 500 firms reporting earnings so far, corporate profits are lower than a year ago, yet a whopping 79% are broadly beating expectations. Add that to the 71%* of S&P 500 firms beating expectations in Q2 and Q1 2009's 65%**, and it's clear a trend is emerging. On absolute terms, earnings aren't stellar, but most firms are continuously beating too-meager expectations.

It's certainly tempting to dismiss the positives of just-released earnings and say, "It's just because of cost-cutting." True, cost-cutting has indeed helped profit margin expansion. What's unusual about today—relative to past downturns—is better business systems allowed corporations to slash costs and get lean faster and more efficiently than ever before—arguably exacerbating the initial downturn as firms quickly trimmed inventory, cut headcount, and generally battened down the hatches. We wouldn't be surprised to see next quarter's earnings also exceeding analyst forecasts, tied to unexpectedly improved economic activity that drives top-line revenues above analyst forecasts. Even modest increases in top line sales could yield big profit increases because of increased profit margins resulting from today's massive operating leverage at many companies.

Another quirk to watch forQ3 2009 is the last quarter with a relatively high earnings bar to hit since the economic downturn began in earnest in late Q3 2008. Earnings in Q4 2009 could see big percentage growth off last year's low hurdle—and big percentage year-over-year earnings growth could provide a nice psychological boost to the market.

So expect the unexpected—positive earnings surprises for the future are likely through the balance of this earnings season. And possibly, into the next.

*Bloomberg
** Thomson Reuters

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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