It’s Time To Watch the Earnings Reports

Monday, October 12, 2009

newspaper-1The third quarter earnings report season begins in earnest this week, and the numbers are especially important. They will provide a real measure of company and industry health and growth, along with a good indication of the economy’s progress. In addition, investors will use the earnings to test the reasonableness of the stock market’s current level. Here’s what to look for…

First, good reports from leading growth companies – the ones that play an important part in the US economy’s advancement.

Second, acceptable reports from basic industry companies – the ones that perform in line with the economy.

Third, acceptable reports from retailers – the ones that are dependent on consumer spending.

Fourth, no shocks from financial service companies – there has been plenty of time for them to have incorporated the bad news.

Fifth, there should be close to a record number of companies beating analysts’ earnings estimates. Last quarter, 73% did – a record. This odd requirement is based on investors’ expectations that results will beat analysts’ earnings expectations. Investors believe that companies and analysts continue to be conservative in their forecasts, so the earnings estimates should be on the low side.

If those five areas come in as hoped, the stock market’s level should be affirmed. In addition, the above-expectation earnings should boost 2010 earnings estimates.

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