Is market optimism due to expected rise in S&P 500 earnings in late 2012?

Of the 272 companies in the S&P 500 that have reported earnings to date, 65% have reported actual EPS above the mean EPS estimate. This percentage is below the average of 73% over the previous four quarters. Some of the companies that reported significant upside earnings surprises during the past week include Allstate, Northrop Grumman, and Amazon. While the blended earnings growth rate for Q4 2011 for the S&P 500 improved to 5.8% from 5.3% during the week, it is now basically back to the expected earnings growth rate on December 31 (5.7%).

However, the price of the index has jumped 5.4% (to 1325.54 from 1257.60) since the start of the Q4 2011 earnings season.

Given the moderate results of the earnings season to date, what is behind the rise in the market?

One possible explanation for the increase in price is the fact that analysts are expecting corporate earnings to rise through the later quarters of 2012 after a small decline in Q1 2012. While analysts have slightly reduced estimates for the first three quarters of 2012, there has been no change to the bottoms-up EPS estimate for Q4 2012 since the end of the fourth quarter.

If the final earnings growth rate for Q4 2011 is 5.8%, it will mark the end of the streak of consecutive quarters of double-digit earnings growth for the index at eight. However, two companies account for most of the earnings growth in the S&P 500 for the quarter: Apple and AIG.  If these two companies are excluded from the index, the Q4 2011 earnings growth rate for the S&P 500 drops from 5.8% to 1.0%.  Comparisons to weak year-ago earnings are driving the unusually high dollar-level growth for AIG, while strong results in Q4 2011 are driving the high dollar-level growth for Apple.

During the upcoming week, 66 companies in the S&P 500 index and three Dow components (Coca-Cola, Walt Disney, and Cisco Systems) are scheduled to release earnings results.
 

Read more about Q4 2011 earnings season in this weeks's edition of FactSet Earnings Insight.

All of the data used to compile FactSet Earnings Insight is available in the FactSet workstation.

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