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For 4Q 2009, S&P 500 Earnings Are Set To Rise 6% Or More

StarMine Professional, an advanced analytical tool marketed by Thomson Reuters that collects and interprets the earnings forecasts made by industry analysts, is telling us that for the fourth quarter 2009, companies in the S&P 500 index (excluding the financials) will report an aggregate year-over-year increase of somewhere between six and nine percent. (Only a handful of companies have reported so far.) OK, maybe that's not a startling recovery across the board, but it includes real strength in a number of industries. Besides, going into last quarter, the expected earnings gain was about the same - enough to move the S%P 500 up 10 percent since.

Investors can only expect moderate gains in earnings during a so-so recovery in the broad U.S. and world economy, but some sectors are expected to do pretty well, according to StarMine Professional:

I left out the financials, which are supposed to show increases in the thousands of percent; anyway, the losses created by the financials last year means you can't calculate a year-over-year increase.

Actually what counts more than the earnings themselves is the surprise factor, the difference between what's forecast and realized. The StarMine Professional system keeps track of which analysts are the most accurate, and comes up with the oxymoronic measure of "predicted surprise," also in the table above. It measures how the analysts who are historically the most on-target stand against the average.

While the earnings themselves are certainly important, it's not only the content in a particular quarter that counts: there's also relevance in the pageantry of the earnings season. It turns out that most of the movement in the stock market is concentrated in earnings periods, at least the upside moves.

"This phenomenon has been around all decade," reported John Authers, who writes "The Short View" column for the Financial Times:

Research last year by Andrew Lapthorne of Société Générale in London showed that, since 2000, the average annualised performance during the first, second and third quarter reporting seasons (the fourth quarter's season tends to go on for longer and its effect is more diffuse) had been a 2.3 per cent gain. For all times outside these periods, the S&P had on average suffered a 1.2 per cent annualized loss.
This shows the extent of corporate "earnings management". Companies have been good at setting the market's expectations at a level that they can exceed. The market makes most of its progress when these manufactured "surprises" are revealed.
Mr Authers may seem cynical, but he's probably right. Companies do have a fair amount of latitude in tilting their earnings reports one way or the other, and still are able to stay within accepted accounting guidelines, at least in the short term. And we're in a time now when some companies may be "releasing reserves" they put away for a rainy day during 2008 and 2009. (I worked as an industry analyst years ago, and as a CPA many years ago, and saw plenty of that.)

In any event, earnings season is the time we learn what progress companies are making. Other times of the year we hear about new product releases or news on the general economy, which have a less direct impact on the here and now.

Still, keep in mind that during a typical quarter, something like three-quarters of companies tends to meet or beat analysts' earnings estimates (not a hard thing to do, considering that for most analysts, the companies are the primary source of information).

But if the S&P 500 ex-financials shows a six or seven percent gain in earnings, and that rise confirms an improving mindset on Wall Street (StarMine Professional reports that analysts have marked up their estimates by nearly three percent over the last 90 days), and the market, at about 15 times forward earnings is valued no higher than it was before the last quarter's reports, and, importantly, if the 30 percent earnings increase forecast for 2010 has any credibility, we could be looking at a nice gain from this earnings report.