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updated 2/1/2004 10:30:58 PM ET 2004-02-02T03:30:58

About two-thirds of companies in the S&P 500 that have reported earnings to date have beaten Wall Street's expectations - one of the best showings since the height of the last bull market in 1999.

Furthermore, this earnings season has seen twice as many companies provide positive guidance than in the previous three quarters.

"This is the first time [since the onset of the bear market] that we're hearing a better outlook from companies," said Art Hogan, chief market analyst at Jefferies & Co, who has studied the earnings guidance given by a cross-section of the S&P 500 going back more than a year.

He found that in spite of issuing good earnings for the past three quarters, corporate America had been reluctant to signal the recovery in business to investors. Their guidance - which is often scrutinized more closely than actual results - has been regularly neutral.

One factor in companies becoming more reticent has been the advent of regulation fair disclosure, known as "Reg FD", which banned companies from giving Wall Street analysts advantage over ordinary investors. The other significant factor has been the bear market, which has added to companies' reluctance to predict any upturn in their businesses, as many of them saw their share price hit after being proved wrong.

"Reg FD really got corporate America to shut up for a while," Mr Hogan said. "Now corporate America is finally seeing the light at end of the tunnel and is willing to say so."

But investors have become accustomed to rising profits again, and the expectations bar has been raised substantially. This earnings season has been marked by a sharp divergence: companies that met analysts' consensus but offered conservative guidance saw their shares punished by disappointed investors. Those that gave rosy guidance were rewarded handsomely.

Tom Galvin, head of growth investing at US Trust, said: "We're at a point where you have to do heavy lifting on the bar of expectations to catapult stocks higher. It's not just exceeding the current quarter, but we're looking for a level of visibility and guidance that augurs for higher valuations."

Notable examples are Veritas Software, which shed 15 percent last week after announcing higher earnings, but a cautious outlook. On the other hand, DoubleClick, the internet advertis ing company, which returned to profit in the fourth quarter of 2003, saw its stock soar 16 percent after it painted glowing prospects for ad sales.

The sector showing the biggest rise in profits has been basic materials, with the companies that have reported so far averaging a 66 per cent increase in year-on-year earnings for the fourth quarter. This group has been buoyed by soaring commodity prices, some of which have hit 20-year highs. The increase in metals prices in particular has been driven by rapacious demand from China.

Technology companies have been close behind, notching 64 per cent profit increases in the last quarter of 2003, spurred by the return of capital expenditure by big companies. Whereas the gains of the previous three quarters largely came from cost-cutting, the companies now report real growth in demand.

According to Thomson Financial, nearly every S&P 500 sector has notched up double-digit percentage growth.

Copyright The Financial Times Ltd. All rights reserved.

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