ANALYSIS:Intel's results catalysed gains, but not everyone agrees this translates into economic recovery

SO FAR, so good. That’s been the market consensus since earnings season began in the US last week, with the Dow Jones closing above 10,000 for the first time in a year.

The big hitters have hogged the headlines. Tech giants Intel, Google, IBM and Nokia have reported this week. Financial heavyweight Bank of America reports today while fellow banks Goldman Sachs, Citigroup and JP Morgan have already done so.

Intel’s earnings galvanised the tech sector, reporting third-quarter sales of $9.4 billion (€6.3 billion) – down by more than $800 million from last year but $400 million better than analyst forecasts. Guidance was also upbeat, with Intel predicting fourth-quarter sales of $9.7 billion to $10.1 billion, above analyst estimates of $9.5 billion.

“Tech should continue to surprise to the upside,” said US strategist Ed Yardeni.

Yardeni sees technology as the sector best placed to profit from a global economic recovery. Investors seemingly agree.

The Nasdaq is up by 38 per cent this year, dwarfing the SP 500’s 20 per cent gain. Investor favourites Apple and Amazon are on the verge of hitting all-time highs.

While Intel’s results catalysed market gains, not everyone agrees that this translates into genuine economic recovery.

Taking a “glass half-empty” perspective, Gluskin Sheff economist David Rosenberg said Intel’s results were evidence that “companies are still focusing their attention on tech-led productivity gains rather than focusing on boosting output via a boost to staffing levels”, typifying the “deflationary thrust emanating from the corporate sector”.

JP Morgan, meanwhile, helped justify the financial sector’s recent runaway gains, posting profits of $3.59 billion, or 82 cents a share, trouncing analyst estimates of 52 cents a share. Revenue increased to $28.8 billion, a record year-to-date figure.

Despite posting a revenue increase in five of its six lines of business, sceptics noted that the marked strength in its investment banking unit was masking weakness in the bank’s consumer and credit-card business.

JP Morgan chief executive Jamie Dimon warned that, while there were “initial signs of consumer credit stability, we are not yet certain that this trend will continue”.

Loan loss provisions continue to climb. Citigroup yesterday reiterated that the consumer credit environment remained “challenging”.

Specific quibbles aside, it’s looking increasingly likely that this will be the third straight quarter in which SP 500 companies surpass expectations. Some 83 per cent of companies reporting so far have beaten estimates.

A “beat rate” of 73 per cent was secured in the last quarter, well above historical beat rates – 61 per cent – and the best in 15 years.

Aggregate reported earnings were 13.5 per cent above estimates, way above the average 1.7 per cent figure reported since 1994.

Second-quarter earnings were driven by costcutting rather than revenue growth, however – just 49 per cent of companies exceeded revenue estimates.

This is unsustainable and, unless revenues improve, overall equity-market earnings estimates will eventually be “revisited, revised and reduced”, Rosenberg warned.

Investors are looking for topline growth rather than earnings beats, so much so that commentators are speaking of “revenues season” rather than “earnings season”.

So far, 58 per cent of companies have beaten revenue estimates. Intel and JP Morgan’s revenue beats triggered excited chatter. But even market bull Yardeni notes that, while all seven of the sectors with third-quarter data have reported a positive earnings surprise, “just three of the seven have a positive sales surprise”.

Investors have punished companies suffering revenue shortfalls.

Johnson Johnson declined on Tuesday after it beat earnings estimates while missing revenue targets.

The same phenomenon saw Pepsi fall last week while Nokia was slammed yesterday after coming up short on revenues. Yesterday also saw Goldman Sachs slip in early trading even though it delivered a convincing earnings and revenue beat.

Goldman fell short of the unofficial “whisper number” circulated in recent days, indicating a market in less generous mood than in the quarter gone by.

The low level of negative company pre-announcements indicates that third-quarter earnings should remain strong. Despite growing analyst optimism – the number of raised earnings forecasts over the last month means analysts were more bullish heading into this earnings season than in any other season since the recession began – companies don’t have a high bar to clear.

Consensus earnings estimates have risen by just 2.8 per cent since the end of May while full-year earnings are still expected to fall by 25 per cent.

Next year is different. Not only are analysts expecting the first full-year earnings gain since 2006, but they have pencilled in a 25 per cent profits increase. Pepsi warned last week that the “age of thrift” in the US and Europe would persist throughout 2010, while a more optimistic Google “clearly see aspects of recovery”.

The “less-than-certain underlying economic outlook” means 2010 estimates may yet be a “tough ask”, cautioned Andrew Lapthorne of Société Générale.