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Earnings Season: Are Early Numbers Flashing a Warning Sign?

To all appearances quarterly earnings season is off to another boffo start. IBM, Intel, GE, DuPont and Apple, to name just a few, look to be gushing with year-over-year profit growth. But if the so-called beat rate is any indication, earnings expectations may not play out quite as robustly as the early market action would indicate.

Investors -- also known as those people who still adhere to the quaint notion that stocks represent a claim on a company's long-term stream of cash flows returned in the form of dividends or else kept on the books as retained earnings -- can mostly ignore the short-term quarterly noise of whether Blue Chip Inc. beat Wall Street's top- and bottom-line guesstimates.

Traders, however, must live to trade another day -- and often they do so by how often companies exceed analysts' average expectations. And in that regard, the latest info from the good folks at Bespoke Investment Group ain't all that promising.

True, it's still very early in the quarterly reporting season, but thus far only 64% of U.S. companies have beaten Wall Street's profit estimates, according to Bespoke data. For a little context, prior to the financial crisis and recession, an average quarterly beat rate of around 63 percent was par for the course, according to data from Thomson Reuters. Then, after everything collapsed during the recession, understandably anxious analysts set their bars very, very low, making beat rates in the 70-percent-plus range become sort of the new normal.

So how does the current beat rate stack up against all that? Well, the current beat rate of 64 percent would be the weakest reading since the start of the bull market back in April 2009, the folks at Bespoke say. Have a look at this nifty chart, courtesy of Bespoke Investment Group, below:

Earnings Season Beat Rates Flashing a Warning?
Once again, yes, earnings season is still quite young. By the end of this week we'll have heard from just 147 of the S&P 500 companies, according to Thomson Reuters data. However, as Bespoke points out, an earnings season beat rate "has historically started out high and drifted lower as earnings season progresses."

That's unfortunate, because if that pattern holds up during the current earnings season, the "'beat rate' could have a five handle," Bespoke says.

If the beat rate does indeed to cool down to that 50 percent-ish level, short-term market momentum could very well slag off right with it. Just another reason to maintain something longer than a three-month horizon.