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Stock Earnings Are Losing Steam

More than half of companies that have earnings for the December quarter have beaten Wall Street estimates. But that’s less of a sign of strength than it sounds.

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With numbers out for 196 of the S&P 500 index members, 105 of them, or 54%, have beaten estimates. But as SmartMoney.com has reported in the past, upside earnings “surprises” have become commonplace, with companies and analysts consistently forecasting low.

The average beat rate since 1994 is 62%, according to Thomson Reuters. Since the beginning of 2009 it has been much higher, ranging from 66% to 77%.

That makes this quarter’s dearth of upside surprises a surprise unto itself.

This week brings earnings reports from 98 more companies. As of Friday, using a blend of reported earnings and estimates, Thomson Reuters estimated that fourth quarter earnings will increase 7.9% from a year earlier. That would mark the first single-digit growth in two years.

Without two factors, earnings would be closer to flat. First, subtract Apple’s blowout results from the total, and the S&P 500 is expected to produce 4.7% earnings growth, according to Thomson Reuters.

Second, companies have been spending richly on their own shares, reducing the outstanding share count for S&P 500 companies. Howard Silverblatt, senior index analyst at S&P, says this quarter will be the first since 2007 where repurchases will have a meaningful impact on earnings per share, increasing them by 4% from a year earlier.  Subtract that from projected earnings growth and there’s not much left.

More companies have also been beating earnings forecasts but missing on sales, a sign that much of their growth is coming from cost-cutting. And looking ahead to next quarter, the ratio of negative pre-announcements to positive ones is higher than average, according to Thomson Reuters.

For stock investors, all of this suggests that America’s remarkable surge in corporate earnings is rapidly losing speed, although that’s not necessarily a sign of trouble to come for investors. Some pockets of the market, like technology, look relatively strong (see Tech Stocks: Safer Than You Think. And the overall 500 index trades at 13 times estimated 2011 earnings, a smidgen below its historic average.

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