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Looking to Earnings for Guidance

According to Thomson Reuters, over 70% of companies beat their 2nd quarter estimates which marked the highest percentage of companies surpassing estimates since Thomson Reuters began tracking this type of data back in 1994. To put this in a historical perspective, in a typical quarter, approximately 61% of companies eclipse their estimates. One particular industry showing particular strength was Health Care which interestingly is also one of the only industries that has actually added jobs in the last twelve month period. However, we, at Hennion & Walsh, believe that third quarter earnings should be carefully dissected before reaching any forward-looking conclusions and further believe that this holiday season will likely disappoint and lead to lower fourth quarter earnings than many analysts are predicting at this point in time.

Recent data is supporting our stated beliefs above.  For example, Thomson Reuters reported in a September 4, 2009 article entitled, “U.S. 3rd quarter company earnings seen falling 22 pct,” that the third quarter earnings from S&P 500 companies (i.e. U.S. Large Cap companies) are expected to decline over 22% from a year ago. Disappointing 3rd quarter earnings followed by lower than expected 4th quarter earnings could result in an initial pullback and later pause in the equity markets that many believe is inevitable. It would also suggest that most economic progress and corporate earnings increases thus far in 2009 have been provided for by government stimulus and company layoff and efficiency gains.  

For the economic recovery progression to continue to advance, corporate earnings must strengthen through increases in sales (i.e. not just revenue increases), which would likely be the result of increases in consumer spending.

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