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Companies will begin to report earnings for the second three months of 2014. There are a few reasons to be optimistic this time.

By Stephen Gandel
July 7, 2014

For the past year or so, the market has been pushed higher by rising enthusiasm. Wall Street might soon have something to cheer about.

This week, companies will begin to report their earnings for the second three months of 2014. Earnings season kicks off on Tuesday with Alcoa  AA . The mega banks JPMorgan Chase  JPM and Wells Fargo WFC report on Friday.

Profits are supposed to be up. Analysts expect that, on average, the bottom lines of companies in the S&P 500 jumped nearly 5% in the second quarter. That’s up from an increase of just over 2% in the first three months of the year.

Actual earnings growth will likely be even larger than that. Wall Street analysts are famous for low balling. It’s all part of the Wall Street game. On average, about two-thirds of companies typically “beat” their numbers. And, also on average, over the past four years, the actual earnings growth rate has ended up being 2.8 percentage points greater than the projected percentages, according to John Butters, who tracks earnings trends at data provider FactSet. So, the final tally on earnings growth in the quarter could end up being nearly 8%.

Another reason to be optimistic about earnings: Slippage. At the start of the second quarter, analysts were predicting that the companies in the S&P 500 would have a collective $29.45 in earnings per share. The estimate now stands at $28.96, or 1.7% less than three months ago.

That might sound like a bad thing, but it is actually quite good, according to Butters. The drop in this quarter’s estimates is much smaller than usual. In the past year, the average decline in earnings estimates over the course of the quarter has been 3.6%. Over the past 10 years, the average slippage has been 4.3%.

The question, though, is whether all this is setting up Wall Street for a fall. For the whole year, analysts are expecting earnings growth will top 11%. That may be a bit too optimistic.

Revenue projections only have sales of the companies in the S&P 500 rising just over 3%. For profits to rise nearly triple that, companies will have to significantly cut costs. And with hiring picking up, that’s not likely to happen.

 

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