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Traders work on the floor of the New York Stock Exchange June 18, 2012.BRENDAN MCDERMID/Reuters

Is it too early to freak out about the second quarter earnings season? The stock market doesn't think so, which is partly why major North American equity indexes have fallen every day this week.

Alcoa Inc. kicked off the earnings season on Monday evening, and although the company's operating earnings were in line with analysts' expectations, they made it clear to investors that companies are struggling.

Bespoke Investment Group has provided a tally for how things have unfolded so far. And while they acknowledge that these are early days in the season, the emerging picture is ugly: Just one of the 16 companies that have reported so far (as of Wednesday night) has beaten expectations. That would be A. Schulman Inc. Three companies have reported results in line with expectations, and 12 companies have missed expectations.

The market's reaction has been severe: On average, stocks have fallen 5.45 per cent on the day following the quarterly report.

"Analysts have slashed earnings estimates in recent weeks leading up to this reporting period, but there was still a big question over whether they had slashed estimates enough," Bespoke said. "At least for the companies that have reported, they clearly did not."

Maybe they're busily making adjustments now, though. At Bank of America, strategists on Thursday cut the overall earnings expectations for companies within the S&P 500 this year and next – to $102 (U.S.) a share in 2012, from an earlier estimate of $103.50; and to $109 a share in 2013, from $110.50.

Those are thin cuts of 1.4 per cent each year, but the direction – down – is likely more important than the size. As well, the strategists noted that the estimates are considerably below those from from so-called bottom-up analysts, or the estimates analysts give for individual companies. Those estimates, added up, imply earnings expectations of $105 a share this year and $118 a share next year.

As the strategists note: "Although the bottom-up consensus forecasts have continued to drift lower since last summer, they still appear too optimistic in light of the ongoing European crisis, the looming fiscal cliff and the slowdown in China. The recent weakness in earnings revision and guidance trends may be a sign that consensus expectations are in the early stages of being reset lower."

Indeed, their skepticism doesn't even focus on the second quarter earnings season – where they believe that analyst estimates are realistic – but rather looks farther out. They argue that it is in the third and fourth quarters that analyst estimates need to come down to reality. For example, analysts expect earnings in the fourth quarter to rise 14 per cent, year-over-year, which is out of whack with expectations from Bank of America economists for the U.S. economy to nudge just 1 per cent higher.

However, if you're not quite ready to shred all analyst expectations for quarterly earnings this season, StarMine has several ideas of which companies are most likely to beat and miss expectations. Their approach uses a weighted average of analyst estimates, placing greater weight on the most recent estimates from the best analysts.

They believe that Yahoo Inc. (which reports its earnings on July 17), Netflix Inc. (July 24) and US Airways Group Inc. (July 20) are the best positioned to beat expectations.

Chevron Corp. (July 27), KAR Auction Services Inc. (Aug. 9) and Canadian-based Westport Innovations Inc. (Aug. 4) are most likely to miss expectations.

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