[转贴] As Earnings Bubble Over, a Rally May Be Baked In

not4weak

by Kelly Evans
Tuesday, October 26, 2010

The third-quarter earnings season has helped the stock market find its footing again. But a solid foundation still is lacking.

Skeptics, however, can be forgiven for not breaking out the champagne. The market's recent behavior looks eerily similar to its prior 15% run-up from February through April. That episode didn't end well. This one may not either.

Under the surface, corporate earnings aren't quite as impressive as the headlines suggest. Much of the overall growth has come from the financial sector, helped by its weak performance a year ago. Yet the foreclosure problems and concerns over future profitability recently have roiled those shares.

Exclude financials, and year-on-year earnings growth falls below 21%. The average "surprise" margin, by which earnings beat estimates, falls from 9% to 6.5%. Meanwhile, for the fourth quarter, expected earnings growth drops from 32% to just 11% if financials are excluded. Revenues for that period are seen up just 6.3%, excluding financials. That is hardly disastrous. But given growth is likely to slow further, it weakens the basis for a more lasting rally.