Equity markets have responded positively to the start of the third quarter earnings season in the US and although it is still early days to drag conclusions, of the sixty six S&P 500 companies that have reported up to 16th of October 52 beat analysts’ forecasts. However there will be more clarity by the end of this week as 135 S&P 500 companies are due to report their results. Some of the themes that started in the second quarter such as the recovery in the financial sector and aggressive cost cutting programs continued in the third quarter. Currently analysts are predicting that earnings will fall by 22.6% from the third quarter 2008, up from previous expectations that earnings would fall by 24.6% at the start of October. While earnings forecasts for the full year 2009 and 2010 have continued to be upgraded and now analysts are expecting earnings to fall by 4.5% in 2009 versus previous forecasts of fall of 13.6% in May, while forecasts are now that earnings will grow by 26% in 2010.

Much of the improvement in earnings has come from the financial sector as major bell-weathers such as JP Morgan Chase, Goldman Sachs and Citigroup all reported much stronger results than expected and now it appears that the financial sector will be one of the few sectors to show positive earnings growth from the third quarter of 2008. This improvement in the earnings in the financial sector is vital in the repair process and allowing the sector to use the bulk of these funds in the de-leveraging process.

As seen in the second quarter companies continued to cut costs at a faster pace than revenues declined indicating that the aggressive cost cutting programs have continued for companies. There was little evidence in the reports of top line growth, as few companies beat analysts’ expectations for revenue. However some companies have guided that they are beginning to see improved economic activity, particularly companies with exposure to the emerging markets region.

On the other hand, the economic data released since the start of the October in the US and Europe has been weaker than expectations. Nevertheless equity markets have traded over 2% higher since the start of October in both US and UK.