Wall St still cautious, despite strong earnings

NEW YORK (Reuters) - Don't believe everything you read.

That's the message from Wall Street in the wake of a generally upbeat earnings season that points to recovering demand.

Despite raised outlooks, positive comments from company executives and quarterly results that beat expectations, Wall Street analysts have pared back forecasts for 2010 as worries about the recovery's sustainability dominate.

Earnings season is winding down, with Wal-Mart's Thursday results one of the last bellwethers. Even though 72 percent of S&P 500 components have beaten the estimates so far, 2010 earnings growth estimates have declined from the beginning of the season.

For 2010, earnings are expected to grow by 26.3 percent, down from the 30.6 percent estimate from early January, according to Thomson Reuters data.

Analysts said revenue growth, while improving, has not been as robust as hoped, raising concerns about how profits can be sustained.

"I don't see robust earnings growth going forward," said Len Blum, managing partner at Westwood Capital in New York.

"At some point, you really have to start driving that top line and to drive that top line, you need to have a robust economy."

SEASONAL SELL-OFF

U.S. equities sold off during this season, falling more than 3 percent since Alcoa (AA.N) kicked things off. That's the first decline for the Standard & Poor's 500 Index .SPX during an earnings season in four quarters, according to Bespoke Investment Group, a research firm in Harrison, New York.

This was partly due to the rally in stocks in the last year, as well as worries over fiscal instability in the euro zone that overshadowed much of the reporting season.

But the reports themselves also had potholes: Wal-Mart Stores Inc (WMT.N) forecast results for the first quarter that could miss estimates.

Bellwether Caterpillar Inc (CAT.N) also shook investors with an unexpectedly guarded view of the year, though it said it was seeing encouraging signs of increased global demand.

Still, the jitters over the debt loads of Greece and other euro-zone nations served as a reminder of the headwinds to sustained economic growth that remain, and that has injected a note of caution into the outlook for the first quarter.

For the short term, demand has picked up, but businesses and consumers are still showing caution. That creates a Catch 22: For businesses, that means limited hiring plans, and for consumers, reduced spending due to high unemployment.

The Federal Reserve's increase in the discount rate added a new wrinkle to that equation.

"Exiting the era of low interest rates is going to test the bullish thesis that the current economic recovery has a solid foundation, and it is going to be self sustaining," said Doug Kass, president of Seabreeze Partners Management in Palm Beach, Florida.

At Friday's close, the three major U.S. stock indexes ended the session with slight gains. For the week, stocks also advanced, with the Dow Jones industrial average .DJI up 3 percent, the S&P 500 up 3.1 percent and the Nasdaq .IXIC up 2.8 percent.

TOO OPTIMISTIC?

To be sure, some of the sell-off was due to excessive optimism.

With 84 percent of S&P 500 companies having reported fourth-quarter figures, 72 percent of companies exceeded expectations, according to Thomson Reuters data. Growth topped 212 percent, although that number was inflated when compared with last year's dismal fourth-quarter results.

Solid results were no guarantee of a boost for the stock, as even some companies that beat expectations and offered cheery outlooks saw their shares take a hit.

Though the majority of companies beat analysts' earnings expectations in the fourth quarter, more fell short of expectations for revenue, showing companies are having more success tightening their belts than boosting demand.

Twenty-nine percent of companies missed analysts' estimates on revenue, with zero coming in "in line," while 71 percent beat forecasts. In comparison, 18 percent of companies missed expectations on profit and 10 percent matched.

"If you beat and you raised, but were up 100 percent the year before, your stock was going down," said Kurt Brunner, portfolio manager at Swarthmore Group in Philadelphia.

International Business Machines Corp (IBM.N), for example, raised its 2010 profit target and reported results that surpassed expectations. But its stock tumbled after rallying along with the market the last year.

Analysts also cited the resurgent importance of the "whisper number," an anticipated figure that is often higher than the official consensus expectation. According to John Scherr, president of WhisperNumber.com, only 63 percent of companies beat their whisper numbers.

(Editing by Jan Paschal)