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Surprise! First-Quarter Earnings Off To A Record Start

 April 24, 2012 12:58 PM

(By Louis Basenese) I told you five days ago that aluminum giant, Alcoa's (NYSE: AA) better-than-expected earnings wasn't a fluke. And the evidence keeps piling up to support me.

From Johnson & Johnson (NYSE: JNJ) to Morgan Stanley (NYSE: MS), and ConocoPhillips (NYSE: COP) to real estate rebound play, D.R. Horton (NYSE: DHI), companies keep beating expectations.

[Related -Apple Inc. (AAPL): June Quarter Revenue Under Microscope After Weak March Guidiance]

After Apple (Nasdaq: AAPL) reports earnings today, we should be able to add it to the list, too.

To put the strength in perspective, though, let's check up on the three key earnings statistics I told you to track this earnings season:

[Related -Apple Inc. (AAPL): How Q1 Earnings Will Fare?]

Key Statistic #1: Earnings "Beat Rate"

This is a measure of the percentage of companies beating analysts' expectations for profits. The long-term average is 62%.

As of last Friday's close, Bespoke Investment Group reports that 72% have beat expectations. If we limit our analysis to just the 94 companies in the S&P 500 Index that already reported results, the beat rate jumps to 76.6%.

The highest earnings beat rate ever recorded be Bespoke is 73% (Q1 2006). Whether or not this quarter earns the top spot, it's definitely on track for a putting up a record.

Key Statistic #2: Revenue "Beat Rate"

This is a measure of the percentage of companies beating analyst expectations for sales. Like the earnings beat rate, the long-term average is also 62%. But so far this quarter, 70% of companies have beat sales expectations.

Although that's below the record beat rate of more than 75% hit back in late 2003 and early 2004, it's well above last quarter's revenue beat rate of 56.7%.

As I said last week, "A reading above 65% would be extremely bullish." And we got one!

Key Statistic #3: Guidance Spread

This is a measure of the difference between the percentage of companies raising guidance and the percentage of companies lowering guidance.

So far this earnings seasons, 7.4% of companies raised guidance and just 4% lowered guidance. The result? A guidance spread of 2.4%, which is a sharp reversal from the last two quarters when more companies lowered guidance than raised it.

Add it all up and if share prices ultimately follow earnings, this is decidedly good news for the stock market.

So what do I make of yesterday's widespread selloff? Not much.

Remember, bull markets don't charge higher uninterrupted.  Like world-class sprinters, they need to take a breather.

As InvestTech Research's Jim Stack notes, there were 24 corrections of more than 4% during the 1990's bull market and nine corrections during the October 2002 to October 2007 bull move.

And this "spirited cyclical rally," as Barron's refers to it, is no exception. Since March 2009, it's endured "11 spasmodic episodes."

Bottom line: Even though Barron's refuses to admit it, we're in a bull market. We have been for three years. And based on the latest earnings data, I'm convinced this bull market is going to continue.

So yesterday's selloff should prove to be nothing more than a bump in the road. Anyone care to bet against me?

Ahead of the tape,

Louis Basenese



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