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In a big reversal from last quarter, firms are beating sales expectations

Reporting season is often called earnings season – but maybe we should be calling it sales season instead, given the rising importance being attached to revenues these days.

"With already lean cost structures, sales growth is crucial for earnings growth, and companies that beat on both metrics are likely to be rewarded most this earnings season," said Savita Subramanian, equity and quant strategist at Bank of America, in a note.

But the news is good so far. According to Ms. Subramanian's numbers for the first two weeks of the fourth quarter reporting season, 63 per cent of companies in the S&P 500 have beaten expectations on sales. That marks a big reversal from the previous two quarters, when about two-thirds of companies missed sales expectations.

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Just as promising, sales forecasts are also on the rise.

However, these are early days for fourth quarter reports. Alcoa Inc. officially kicked off the season on Jan. 8, and since then just 19 per cent of companies in the S&P 500 have delivered their results – concentrated in financials – leaving a lot of room for a shift in the trend. The next two weeks are going to be crucial.

And while companies have been exceeding expectations, those expectations are modest. According to Ms. Subramanian, sales are expected to grow just 1 per cent, year-over-year. Non-commodity sectors are expected to grow their sales by low single-digits. Meanwhile, earnings are set to grow just 2 per cent.

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