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Earnings are coming in far better than expected this quarter. Thus far, 83% of companies have topped analyst’s expectations. That’s an astounding figure compared to the historical average of 62%. But as I mentioned the other day with Apple’s earnings release it’s more important to look under the hood than it is to take these figures at face value. After all, “better than expected” could simply reflect the low level of the underlying estimates and not the strength of the actual data.

(Image Source: CNN)

The best way to gauge the organic growth in corporate earnings is to look at the top line growth. Revenues per share have climbed 10.9% from the trough in December 2009 and remain 12.75% from their peak – a recovery, but a recovery with a lot of work to do before we can say that corporate America has fully recovered. This quarter’s 7% year over year growth is a bit stronger than last quarter’s 6% year on year figure. This is a positive trend. But a closer look at the revenues tells a story of two very different economies.

In my intense focus on the domestic balance sheet recession I have not focused enough on the strength abroad – particularly in Asia. There is no doubt that revenues have rebounded across corporate America, but the domestic recovery in revenues is hardly robust at this point. This has been apparent in all earnings thus far where we have have seen consistent reports of strong international revenues and weaker domestic revenues. Yesterday’s average daily package volume from UPS highlighted this. While they showed 3.5% year over year growth domestically, their international growth was 13.7%. This is very important. While we see deflationary trends in the developed world we continue to see inflationary trends in the emerging world.

This early glimpse at earnings shows that results are coming in substantially better than expected and revenues are surprising to the upside nicely. Although most of the revenue recovery is occurring abroad it’s a positive sign for corporate profits any way you cut it. If this trend is to continue it could be positive for the labor market, however, because cost cuts have contributed so substantially to the bottom line (33% year on year EPS growth thus far this quarter) there is no great urgency for firms to hire. Companies can sit on their fat margins and churn out nice profits until they are certain that revenues have stabilized and there is a need for labor expansion.

This is going to be crucial when considering the future strength of the economy in the USA. This margin expansion has created flexibility that is good for corporations and bad for the millions who remain unemployed as it likely means the climb out of the job’s trench will be a long road. This situation was beautifully summarized by Caterpillar yesterday in their earnings release:

“I am pleased that we have put so many people back to work this year, and with continued global economic growth, we will add people in 2011 but remain keenly focused on cost control. While we are expecting positive economic growth in the United States, the recovery is weaker than we’ve seen historically, particularly given the depth of the 2009 recession. “

In other words, they’re cautiously looking to hire, but have no great urgency as they remain concerned about the outlook for the domestic economy and margins remain the number one priority. All of this points to signs of a continuing weak domestic economy and earnings growth that is being supported by Asian growth and margin expansion.

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