Despite dire forecasts, this earnings season has not really been so bad, says MoneyShow's Jim Jubak, but he thinks investors might be smart to concentrate on next quarter's earnings.

For the week ahead, pay attention to earnings—but in a different way than usual.

What is really interesting about this earnings season—the third-quarter earnings season—is that I think the individual company earnings are less important than a developing sense of...well, maybe we’ll just overlook the whole quarter completely.

Now, there was a lot of fear around this quarter going into it. The S&P projections were that they would actually see a drop in year-to-year earnings of about 2% to 2.5%. That made people really, really worried, because the market—in September, anyway—was up at a very high level, setting the high for the year. That is not want you want to see as you’re going into a season where earnings are going to be falling.

But what has been interesting is that Wall Street always plays lots of games. So when you go into an earnings season, the question isn’t so much are earnings going to rise or fall, but where are expectations?

There was a general sense that earnings for the quarter were going to be bad. A lot of companies cut their guidance; a lot of analysts cut their projections; and so far, by—say the middle of October—we were looking at about half of the companies in the S&P were reporting positive earnings surprises. It wasn’t that earnings were so good; it was that the fear had gotten to be so great that companies had cut their projections so much that now, we are actually beating those very, very, very low projections.

One of the things that is happening right now is that as this is going on and we’re not seeing catastrophic misses, we’re not seeing huge downgrades of guidance...people are starting to say "Well, OK, so this is where we are into the third quarter." But it looks like the damage has been done, and maybe I will start looking ahead to the fourth quarter.

Now, the fourth quarter is a very different prospect. It looks like right now, according to analyst projections, that earnings for the S&P are going to rise between 7% and 11%—that’s year to year. That is fourth-quarter 2012 to fourth-quarter 2011. So if you look at that and you say "OK, I am looking forward. I am going to overlook the current mess and look forward to that quarter. Gee, that makes me optimistic about stocks."

It especially makes you optimistic about stocks if you notice that you are getting good reach on numbers; that people are starting to talk about retail season being very, very strong. They are starting to speculate about Christmas being good. You are getting housing numbers that are higher than expected.

So all of those things are really starting to make people look and say, "OK, our earnings season for the third quarter is what earnings season is, but the way we value stock is by looking at the fourth quarter." And the fourth quarter looks pretty good. In which case, this rally that we’ve got that seems to be taking off around October 15 or so might actually run for a while.

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