In a game of "beat the street" companies and analysts are busy downgrading corporate earnings. By the time earnings are reported, companies will "beat the street" on those carefully downgraded estimates.



Please consider Earnings outlook may be deteriorating rapidly



Earnings season is just over a month away, but the early signals are not comforting.



Companies cutting forecasts outpace those raising estimates by the greatest ratio in 10 years, and some sectors, such as materials, have seen a dramatic fall in expectations for the soon-to-be ended fourth quarter, according to Thomson Reuters data.



It is a stark reminder that even as U.S. economic data has improved in recent weeks, the euro zone debt crisis and concerns about slowing growth in China still cast a long shadow.



Estimates for fourth-quarter S&P earnings growth have tumbled over the past two months as global macroeconomic headwinds prompted analysts to slash forecasts.



According to Thomson Reuters, 88 S&P companies have issued negative earnings preannouncements for the fourth quarter, compared with 25 positive announcements, creating a ratio of 3.5, the largest since the second quarter of 2001.

Of all the inept reasons to be bullish about equities, "beat the street" hype is near the top of the list. The fact is, in aggregate, ever since Reg-FD (full disclosure) companies always beat the street.



In Surprising Optimism in Face of Weekly Global Equity Carnage; Foolish Comments of the Day; "Beat the Street" Bullsweet I noted nearly every quarter, even in 2008 and 2009 the majority of firms beat estimates. Here is the way the process works:



Corporations give analysts "tips" regarding profit expectations.

Those profit expectations are purposely low.

Wall Street analysts lower estimates, if necessary, as the quarter progresses such that corporations can "beat the street".

If corporations are going to miss and need an extra penny, they change tax assumption or make other "one time" adjustments as necessary.

Corporations beat the street by a penny with "pro-forma" (after adjustment) reporting.

Percentage of Companies that "Beat the Street"







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The last time companies failed to "beat the street" was third quarter of 1998. At the earnings trough in third quarter of 2008, 58% of companies in the S&P 500 still managed to "beat the street".