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July 23, 2012

Chart of the Week: Earnings Revisions Ratio Weakening Along with ISM Readings

by Alpha Now Research Team.

Analysts anticipate sluggish growth in lowering their forecasts for earnings growth rates lower.

In the heart of second-quarter earnings season, solid earnings reports have helped give a more positive tone to the stock market with about two-thirds of companies in the Standard & Poor’s 500-stock index reporting results that were better than expected.

What remains to be seen, however, is whether this trend can continue and – just as importantly – whether their outlook for future quarters is upbeat, or whether many companies will continue to “beat” earnings forecasts that analysts already have trimmed throughout the preceding weeks and months.

This week’s Chart of the Week illustrates graphically what is at stake, plotting the earnings revision ratio for the MSCI world index against the ISM manufacturing index. As the rate of global growth has slumped again in recent months, so, too, has the earnings revision ratio, as analysts have become more anxious about the impact of that slowdown on the rate of growth in corporate earnings.

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Even as companies reported stronger than expected earnings, however, they remain cautious when it comes to their outlook. Bank of America, for instance, is able to gauge the outlook for future growth not just on its own behalf, but through the eyes of its clients, a cross-section of corporate America. “There remains some uncertainty (that) largely revolves around the situations in Europe, the United States, around the longer-term fiscal issues that must be dealt with,” the bank’s CEO, Brian Moynihan, told investors on a post-earnings release conference call.

This means that once the earnings season and its flow of news comes to an end next month, investors’ eyes will once more be glued on to the economy, in search of more insight into what lies behind corporate earnings power and that revisions ratio.

For more insight into the outlook for corporate earnings, please take a look at this week’s Earnings Roundup from AlphaNow.

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