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Earnings expectations: Does lower mean better? Add to ...

Stock markets have been enjoying nice bumps on days when economic news has beaten expectations. Beating expectations, of course, hasn’t been very hard because expectations for Europe, the United States and even China are so low. A glimmer of hope and – wham! – stocks surge. Could the same thing happen with earnings?

Bespoke Investment Group pointed out on Wednesday that earnings expectations – among analysts, at least – are sliding lower and lower for companies within the S&P 500. Right now, these bottom-up expectations are for earnings to rise just 6.2 per cent in the fourth quarter, over last year, down from a rise of 14.1 per cent at the end of September. In the third quarter of 2011, earnings rose 14.7 per cent over the previous year.

Bespoke sees an upside with the lower expectations, if they are baked into stock prices: “While this trend lower in earnings estimates can be viewed as a negative, it also opens up the door for companies to beat expectations at a higher clip.”

The unofficial start of the earnings season arrives on January 9, when Alcoa Inc. delivers its fourth quarter report. It concludes on February 22, with Wal-Mart Stores Inc.

Follow David Berman on Twitter @marketblog

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