Earnings Derby: And They Are Off!!

We said in a recent post that we thought that corporate earnings would lead the next up leg of a new bull market. It may be the height of optimism, and we are sure we will be scolded for it, but we believe that "less bad" earnings growth will be rewarded by Wall Street with an uptick in stock prices. We say less bad because earnings growth for the S&P 500 Index stocks is currently estimated to be down by nearly 30% from the second quarter of 2008. This past week was the official beginning of the earnings-reporting season. Because we believe that earning results are so important this quarter, we will keep a running scorecard provided by Bloomberg, for our readers . Of the 500 companies in the S&P Index, four front runners made their reports this week. Granted this is a very small sample, but the results are encouraging. Three of the four early-reporters beat estimates by wide margins. Although Alcoa (AA) reported lower earnings, they beat Wall Street's estimates handily. Of particular good news, Family Dollar Stores (FDO), the deep-discount chain, reported earnings 36% higher than a year ago and 5% better than Wall Street estimates. In our judgment, last quarter's good stock performance was propelled by the better-than-expected earnings for the quarter, as we detailed in our May 4th blog. Bespoke Investment Group at seekingalpha.com has a nice piece on last quarter's better-than-expected earnings and what they think it will take this quarter to get the market's attention. Bespoke is saying that the earnings beats must exceed last quarter's 62% beat rate. We are in the camp that believes the beat rate will be better than that. We also predict that the average beat rate is important. We will keep the scoreboard coming each week, good or bad. We are certainly aware that the company guidance will also be important, but that is a very subjective exercise, so we'll stick to just scoring the beat rate.