Another quick update on earnings.
The executive summary: Less Bad.

So far, 191 companies in the S&P 500, representing 50% of its market value,have reported earnings. 81% of the companies reporting have booked earnings that have exceeded analysts’ “admittedly low” expectations, while 2/3 have exceeded sales expectations. Here are some specifics. All comparisons are versus the same quarter in 2008::

Sales: Down 10% in 3rd quarter. Sales in the 2nd quarter were down 19%. Less bad.
Earnings: Down 18% in 3rd quarter. 2nd quarter sales were down 25%. Less bad.

Here are some sectors that exceeded sales expectations:
Tech- 86% of companies reporting exceeded sales expectations.
Consumer Discretionary- 53%
Financials- 92%

Analyst expectations are starting to increase rapidly, and the question becomes, “What happens to the market when results no longer exceed expectations, but merely meet them.” Let me draw a sports analogy.I am a long suffering University of North Carolina football fan (when does basketball start?). Last year, after several consecutive losing seasons, the Tar heels were 8-4 and went to the Meineke Car Repair Bowl, or some other similarly silly-named bowl, and Coach Butch Davis was officially proclaimed DA MAN. Nobody expected anything from UNC football, and last year they exceeded our “admittedly low” expectations. But as a result of last year, expectations for this year were extremely high. After all, Coach Davis said this year’s recruiting class was the best he’s ever had (increased earnings expectations), including the championship year at University of Miami. The first several home games were sell outs (lots of demand), we whupped up on powerhouses The Citadel and East Carolina, and there were whispers of an ACC Championship, Top 10 ranking, a return to glory (high expectations). So, here we are at mid-season, with a 4-3 record, including a 16-3 home loss to the always formidable Virginia Cavaliers, and everyone is once again dog cussing UNC football and asking, “When does basketball start.” And there are empty seats at the home games and the boos have started. So while a 4-3 record is pretty good record historically for UNC, expectations were so high for this year that the record is actually disappointing.

Same thing could happen to the market. Stay disciplined, stick with your Investment Policy Statement, and if you have not rebalanced your portfolio this year, consider doing so. And continue focusing on managing risk and not chasing rewards.

Go Heels. Basketball starts November 6 with an exhibition games against Belmont Abbey. Are they monks?

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