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Stronger economy lifts corporate earnings

When Aloca (AA) began the unofficial start of earnings season earlier this month by reporting worse-than-expected results, some pundits wondered whether it boded poorly for the rest of Corporate America. Those worries appear to have been overblown

According to Bank of America (BAC) analyst Savita Subramanian, 46 percent of the companies that have reported so far have beaten consensus forecasts on earnings per share, 63 percent have surpassed them on sales and 42 percent on both. That's the biggest "surprise ratio" from early-reporting companies since the first quarter of 2012 and an improvement from the last quarter.

Financial services firms such as JPMorgan (JPM), Well Fargo (WFC) and Bank of America each reported results that exceeded Wall Street analysts' expectations despite, in the case of JPMorgan, having to pay billions in legal penalties and a slowdown in mortgage refinancing as interest rates begin to creep up.

Shares of these companies climbed Wednesday, though some analysts note that there is less to the companies good fortunes than meets the eye.

Banks are bolstering their results by tapping reserves and cutting costs, a strategy that isn't sustainable, Josh Rosner, an industry analyst with research firm Graham Fisher, told Bloomberg Businessweek. “At some point you run out of reserves to release, and you can’t cut more costs without cutting loans,” he told the magazine.

Shares of Citibank (C) and Goldman Sachs (GS), which reports tomorrow, also rose. The sector's good fortune is also likely to be reflected in regional banks, with the improving economy expected to spur loan growth, Goldman Sachs said in a research note.

For investors, the quarter has been a mixed bag. CSX (CSX), an operator of freight railroads, on Wednesday reported disappointing results because of a decline in coal shipments, while struggling teen retailer Abercrombie & Fitch (ANF), is starting to show signs of a turnaround. The company said it saw a "sequential improvement in same-store sales" in the current quarter. Same-store sales are a key retail metric measuring the performance of locations opened at least a year.

Wendy's (WEN) also reported better-than-expected results this week thanks to the popularity of its pretzel bacon cheeseburger, while St. Jude Medical (STJ) and DineEquity (DIN), the parent company of IHOP and Applebee's, both topped analyst expectations.

Subramanian thinks multinationals will "surprise to the upside" in 2014 because of the improving financial conditions in Europe and the declining value of the dollar.

General Electric (GE) is due to report earnings Jan. 17, four days ahead of United Technologies (UTX), the parent of Otis elevators and Sikorsky helicopters. Boeing (BA) will issue results Jan. 29.

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