As we expected heading into earnings this has proven to be a pretty spectacular earnings season.   Thus far, over 70% of all firms have exceeded expectations.  Earnings have declined 19% year over year, but risen 11% since Q2.  Revenues are down 14% year over year, but have risen 3% since Q2.  Just 27% of firms reporting have seen year over year revenue growth – not a pretty look under the hood, but improvement off the lows.

Our latest reading on the expectation ratio saw a dip in the indicator.  This was widely expected as it has become practically impossible for the analysts to be more wrong about future expectations.  It is almost unheard of for corporations to outperform expectations to the extent that they have in this quarter and this data is evident in the parabolic rise of the ER over the last few months.  I would expect the decline to continue over the next few weeks as analysts continue to jack up their estimates in the coming quarters.  This could be a sign that the discrepancy between expectations and reality have peaked which could provide for a more difficult road going forward, but we’ll play it by ear as data is released in the coming weeks and months regarding Q4 earnings.

Although the Fed induced liquidity rally does not warrant aggressive equity positions and is a clear sign that the underlying economy remains very fragile, the ER remains a favorable development.  It is the ultimate sign that psychology regarding a recovery in corporate earnings remains too negative.  Whether this trend is waning has yet to be seen, but for now, the corporate earnings environment remains a positive.