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A Scary Development For First-Quarter Earnings

 May 09, 2012 01:48 PM

(By Louis Basenese)  We've all heard the saying, "Don't count your chickens before they're hatched." Well, that's the perfect way to sum up the latest developments in the first-quarter earnings reporting season.

Two weeks ago, I noted how we were off to a record start. Specifically, the earnings "beat rate" – the number of companies beating analysts' expectations for profits – was at an unheard of 72%. (The all-time high is 73%.)

And it was near 80% for S&P 500 companies, which prompted jubilant headlines like SmartMoney.com's "Earnings Season So Far: A Blowout."

[Related -Gold hasn’t lost its allure in my portfolio]

Fast-forward to today, though, and we need to rewrite those headlines because the beat rate is collapsing. As of Monday's close, it dropped to 60%, according to Bespoke Investment Group.

Here's what you need to know about the sharp reversal. And more importantly, how I'm adapting my trading strategy to contend with the troubling situation.

Are Corporate Profits Plateauing?

In a matter of weeks, the steady stream of companies torching expectations like Apple (Nasdaq: AAPL) has slowed to a trickle. Now, we're overrun with a steady stream of disappointments. From natural gas major, Chesapeake Energy (NYSE: CHK), to cloud-computing company, Rackspace (NYSE: RAX), and insurance giant, Prudential Financial (NYSE: PRU), to casino operator, Wynn Resorts (Nasdaq: WYNN).

[Related -Google Inc (GOOG): Why Nest Labs Deal Is A Wakeup Call For Apple Inc.?]

The trend is most evident – and most frightening – when you graph it. Take a look:

Barring a miracle, there's no way the beat rate's going to rebound above the historical average of 62% before Wal-Mart (NYSE: WMT) closes out the reporting season on May 17.

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