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The 2010 first-quarter earnings season could go down as a record-setter. Rarely have so many Wall Street analysts been so happily wrong about corporate profits.

With nearly three-quarters of S&P 500 companies having reported their first-quarter numbers, the earnings-data trackers at Thomson Reuters Research report that profits for the quarter are on track for a whopping 53-per-cent improvement over a year earlier. While it's easy to dismiss the big growth number as merely a symptom of the extremely depressed earnings climate in the early months of 2009 that make for easy comparisons, market watchers are increasingly pointing to the near-unprecedented degree that the latest numbers have exceeded analysts already fairly bullish expectations.

Thomson Reuters reports that of the 337 S&P 500 companies to report their results by the end of last week, 78 per cent had topped analysts' consensus estimates. If that holds, it would be the second-highest pace of earnings beats since Thomson started tracking the data in 1994.

What's more, the companies have, in total, exceeded consensus earnings estimates by 16 per cent - which would be the highest "surprise factor" in Thomson's record book.

Market trackers say these exceptional levels of under-estimation on the part of the Street reflect nagging doubts about the sustainability of both earnings and U.S. economic growth this year - after the second half of 2009 delivered strong rebounds in both, albeit from very weak levels.

"The widespread view was that the initial rebound in earnings last year was attributable mostly to cost-cutting," said Ed Yardeni, president and chief investment officer at Yardeni Research Inc., in a note to clients this week. "So the concern … was that the earnings recovery might fizzle this year. Instead, it has continued to sizzle."

John Butters, Thomson Reuters's senior research analyst and the author of the firm's weekly earnings report, wrote that much of this confounding of the earnings skeptics came from the financial sector - where analysts continued to err on the side of caution because of lingering risks of more unforeseen writedowns and charges. Instead, the sector has powered ahead in its first-quarter results, exceeding analysts' targets by a combined $9.3-billion (U.S.) so far, or 55 per cent above expectations.

"Three companies are responsible for most of the dollar-level upside: Citigroup, Bank of America and Goldman Sachs," he wrote. Without them, he said, the sector would have topped estimates by a much more modest 17 per cent.

Market watchers note that earnings have been coming in above analysts' forecasts since the beginning of 2009 - in other words, since earnings bottomed and reversed course. They say this trend isn't unusual for major turnarounds in the earnings cycle; the Street often lags the earnings trend for several quarters as analysts over-compensate for getting caught in the wrong direction in the downturn.

But there's reason to think the first quarter could mark the peak of this earnings-under-estimation trend, if not its outright end.

Mr. Yardeni noted that forward earnings forecasts "have gone vertical" in the past couple of weeks, driven by the surprisingly strong first-quarter data. That means that in contrast to the run-up to the first-quarter results - when analysts were largely turning cautious and revising their forecasts downward - the Street is now raising expectations for the second quarter and the rest of the year. Those upwardly revised forecasts mean big surprises will be harder to come by.

"I think that could be the case," said Peter Buchanan, senior economist at CIBC World Markets, who tracks earnings trends. He said the rising expectations, coupled with a potential slowing of the pace of the economic recovery in the second half of the year, "certainly could lead to earnings growth not quite keeping up with the expectations" later in the year.