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Good thoughts this morning from David Rosenberg on the early, but developing trend this earnings season – one which has been the primary characteristic of earnings season since the market bottom – revenues are not driving the earnings picture:

It’s interesting to see that earnings surprises seem to be driven by cost surprises rather than revenue surprises.  Consider that for the S&P 500 as a whole, 83% of companies beat earnings expectations with the average “surprise factor” (i.e., results vs. estimates) of 23%. (As a comparison, the average long-run surprise factor for the S&P 500 is 2%.)  However, for revenues, 68% of companies beat expectations but the surprise factor was only 3%, a fraction of the earnings factor.  Yes, it’s early in the season but it does appear at this stage that analysts are underestimating firms’ continued ability to cut costs.

It’s difficult not to wonder about the quality of earnings, given that revenue surprises are significantly lower than earnings. It’s a lot harder to fiddle with revenues than it is costs from an accounting perspective. Fundamental analysts have a pretty good idea about revenues from covering their companies day-in and day-out but it’s harder to know about costs (and write offs, special factorsetc).”

Mr. Rosenberg also notes the deep discrepancy in the financial sector’s results:

“Financials results were interesting.  About 70% of companies beat with an average surprise factor of 63% but on the revenue side, only 43% of companies met expectations (the worst result among the sectors) and the surprise factor is 9%.  So for this sector especially, analysts have misjudged costs (including write-offs) vs. revenues.”

This far this remains a cost driven profit picture.  I fully expect revenues to slowly improve, but anyone looking for a sharp rebound in revenues (and therefore a sharp rebound in hiring) is likely fooling themselves:

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