But hurricanes cause trouble
This quarter does show one ugly wrinkle others haven't - earnings, instead of exceeding expectations, are falling short. Just several weeks ago, analyst projections as compiled by First Call were looking for a 17.8% rise in earnings. The gap would be troubling were it not confined to insurers and General Motors. Allstate stunned Wall Street last week with a loss of $2.52 per share vs. expectations for a loss of only 68 cents. Hurricanes of course were to blame as was the company itself which apparently did not alert analysts. Wall Street analysts, like other investors, largely base their projections on public guidance provided by the company. GM also missed big, posting a loss of $1.92 per share vs. expectations for a loss of 87 cents.

Another wrinkle is extraordinary strength among energy companies, reflecting widening margins in the wake of the big jump in oil prices. Energy companies so far are posting a 69% rise in earnings. Excluding energy, the gain for the S&P 500 falls more than six percentage points to 9.1%. Drug companies made news after Pfizer lowered its forecast. But still the company, along with Merck and Schering-Plough, edged out estimates.

A sector clearly having trouble is chemicals, which is posting a 7% decline. Chemical makers apparently have had to absorb more than their share of soaring input costs. High costs have also held back results at steel and aluminum companies.

But it's important to remember that results overall are not falling short, that corporate profits are showing steady strength. Upward revisions to future quarters are a further sign of strength. Fourth-quarter profits are now forecast to rise 16.2% (graph above), up about 3 percentage points since this time last quarter. First-quarter 2006 profits are seen up 13.7%, up more than four percentage points.

The strength of the American corporate machine is impressive especially considering high energy prices, a budget-conscious consumer, slowing productivity and rising labor costs. But on the plus side are still accommodative interest rates from the Federal Reserve and still stimulative fiscal policy in Washington. Domestic growth has been solid for two years running, while demand from Asia continues to help exporters. Also helping exporters this year are special tax provisions allowing the repatriation of foreign income. Though there's no data as yet on the repatriation effect, it does appear to be adding sizably to the bottom line. But one factor on the negative side is the rising value of the dollar, which had for two years been adding several percentage points to exporter revenue growth. IBM, which posted solid results last week, warned that foreign exchange could prove negative in the fourth quarter.

Stocks still tired
As has been the story for two years now, share prices appear to be lagging profits. The graph below compares year-on-year profit growth with year-on-year change in the S&P 500 index, which has been soft for six straight quarters. Whether stocks begin to respond to earnings is uncertain, but strong earnings, if nothing else, will help keep a bottom on the stock market.