More than 80 per cent of major companies reporting third-quarter results this month have beaten Wall Street expectations. So is business that good? No. Are companies gaming the system? Yes. Corporate America has a habit of low-balling the earnings forecasts used by analysts to determine their estimates. That way,the bar is lower,and companies can easily jump over when the quarter's results are announced even if profits and revenues have fallen off a cliff. Over the last decade,there's been a distinctive tendency for companies to underpromise and overdeliver, says Dirk van Dijk,chief equity strategist of Zacks Investment Research. Lately companies are being even more cautious. They realise investors can very harshly punish any company that disappoints. Beating expectations generally gives share prices a quick lift,but the news can mislead investors about the real state of the business and just how far this economic recovery has to go. In fact,of the companies reporting third-quarter results so far,60 per cent have posted lower net income compared with a year ago. Still,the recession has,if anything,accelerated the flow of positive earnings surprises as companies play it safe and issue more conservative earnings forecasts. Even after last falls financial crisis,the following two quarters produced nearly twice as many beats as misses. The expectations game has been played since the 1990s,when analysts aggregate predictions became widely available on the Internet. But the focus on expectations can distract investors from more meaningful numbers. This past summer,earnings stories trumpeted how banks did better than expected. But many lost sight that earnings were down considerably for most banks and that troubles still shadow the sector.
