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This earnings season is chillier than you think Add to ...

Judging from the reactions to corporate earnings over the past couple of weeks, the first-quarter reporting season is going splendidly. Companies are smashing expectations, leading to the natural conclusion that the bull market is thriving.

Unfortunately, actual earnings and revenues tell a far different story, and one that should give investors reason to feel cautious about the stock market.

This view tends to get trampled because Wall Street has a fascination with how earnings stack up next to analysts’ expectations. Among some of the standouts, Boeing surpassed expectations by 16 per cent and Alcoa beat expectations by a remarkable 37 per cent.

More than 70 per cent of companies within the S&P 500 have cleared the bar set by analysts so far this reporting season, by an average of 7 per cent.

That looks good on the surface. After all, the S&P 500 trades at 15.5 times earnings – a cheap valuation if those earnings are rising at a faster-than-expected clip.

The problem? Earnings growth is slowing, dramatically.

According to the latest numbers from Bloomberg News, earnings are up just 3.5 per cent over last year. That compares with much stronger growth of 6.2 per cent in the first quarter of 2012.

Sales look even worse, rising a mere 0.1 per cent over last year.

Without robust revenue growth, it is not easy to see where bigger earnings are going to come from, given companies have already spent years cutting costs and streamlining operations to juice their bottom lines.

And without earnings, it is not easy to see where stock market gains are going to come from, especially with the S&P 500 up more than 130 per cent over the past four years, to near-record levels.

A stronger global economy could provide exactly what companies need to drive their operations to new heights, but the latest reports have been anything but strong.

The U.S. economy grew just 2.5 per cent in the first quarter, at an annualized pace, which isn’t enough to make any headway into its high rate of unemployment.

China’s economy grew 7.7 per cent in the first quarter, down from the fourth quarter and far slower than its traditional rate of growth, suggesting that its economy is struggling.

As for the euro zone, it may have averted a financial crisis, but it has been unable to break out of a terrible economic slump. The economy contracted by 0.6 per cent in 2012 and the International Monetary Fund expects the economy will contract again in 2013.

“The world has a growth problem,” said Doug Porter, chief economist at BMO Nesbitt Burns, in a note.

That’s no reason to run from stocks, but it does suggest far lower returns than the historical average. GMO, the global asset manager, believes U.S. small-cap and large-cap stocks will probably lose money over the next seven years after inflation is taken into account.

International stocks and emerging market stocks will do better, they believe, but returns will be far from impressive.

At least analysts provide a sunnier view. Right now, they see corporate earnings rising 7.1 per cent in the third quarter and 11.8 per cent in the fourth.

But earnings expectations follow a predictable pattern: They’re optimistic when the reporting season is months away, and then get increasingly realistic – as in, they decline – as the season approaches.

That companies then beat those lowered expectations is hardly a reason to cheer.

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