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Third quarter earnings season continues to confound the bears. With more than 85 percent of S&P 500 companies reporting results, 83 percent have beaten analysts’ consensus earnings estimates. That’s well above historical norms and higher than the 75 percent that beat estimates in the second quarter.

In the second quarter, stronger-than-expected earnings acted as an upside catalyst for stocks and prompted analysts to boost their estimates for future quarters. Despite the higher bar of expectations, a higher percentage of S&P 500 companies have trounced estimates this quarter.

Of course, one of the big bearish talking points after second quarter results was that although companies beat profit forecasts, they generated these results with cost-cutting. The bears argued that although a huge percentage of S&P 500 companies beat on the earnings line, only about 51 percent beat revenue estimates. That suggests that there was no real up-tick in final demand for products and services.

But this quarter, that’s no longer a valid point. More than 57 percent of S&P 500 companies reporting earnings to date have beaten their revenue estimates. And the picture for both earnings and sales varies greatly by sector; check out the table below for a closer look.

Source: Bloomberg

The first two columns show the percentage of each of the ten official S&P 500 economic sectors that beat earnings and sales expectations. The final two columns display the percentage of each sector showing year-over-year growth in sales and earnings.

It’s not surprising that many sectors still aren’t showing actual year-over-year growth in sales and earnings. After all, the US recession likely didn’t end until the middle of the summer this year, and the fourth quarter of 2008 and the first quarter of 2009 were the worst quarters of the contraction.

What was an average recession in the summer of 2008 became the worst recession in at least 30 years by the end of that year. That means that the year-over-year comparisons are still fairly tough for S&P 500 companies.

Some sectors, such as energy, have even more difficult comparisons. Crude oil and natural gas prices hit record highs in the third quarter of 2008, so it’s not surprising that only a handful showed year-over-year growth.

Nonetheless, the 40 percent of S&P 500 companies showing year-over-year earnings growth this quarter is better than the 32.5 percent showing growth in the second. And the nearly 30 percent of S&P 500 stocks showing year-over-year revenue growth beats the 26 percent that showed growth in the previous quarter. Year-over-year comparisons are going to get easier over the next two quarters as the comparable period of late 2008/early 2009 was the nadir of the recession.

The first two columns in the table are more important from a stock market performance perspective; rising analyst expectations and better-than-expected results historically tend to drive market performance. This represents the positive upgrade cycle I outlined here. This cycle drove a major rally in the stock market since mid-August, and third quarter results show that revisions cycle is alive and well.

A few sectors really jump out of the table. Chief among those is Information Technology (IT). Nearly 90 percent of IT companies reporting earnings to date have trounced expectations, while close to 79 percent are beating on the revenue line, well above the S&P 500 averages on both counts. Several major technology firms, including Cisco Systems (NSDQ: CSCO), Intel (NSDQ: INTC), Google (NSDQ: GOOG) and Amazon.com (NSDQ: AMZN) have made positive comments about a return to growth in the IT sector.

One reason for this is that the IT sector ranks among the top of the 10 sectors in terms of the percentage of revenues generated from outside North America. Because many IT firms have reported far stronger growth outside the US and Canada, this has been a major tailwind. IT remains one of my top-weighted sectors in Personal Finance, as it’s been since February.

The figures for the energy sector strike me as rather misleading. The S&P 500 Energy Index is up just 16.3 percent this year, underperforming the S&P 500, which is up nearly 23 percent. Yet energy stocks are among the best-performing plays in PF and are one of the major reasons we’ve beaten the S&P 500 so far this year.

The reason for the seeming paradox: The S&P 500 Energy Index is dominated by integrated oil companies, particularly giants like ExxonMobil (NYSE: XOM). There’s nothing inherently wrong with these Super Oils, but there’s nothing magical about the group either; they’re typically just the combination of three basic business lines: exploration & production (E&P), refining and chemicals.

The E&P business has benefited from higher oil and, to a lesser extent, natural gas prices of late. But the big integrated oil companies haven’t seen as large a benefit as the smaller E&Ps because most have not been growing their production and, with a couple of exceptions, are unlikely to do so in the near term.

Meanwhile, the refining business in the US is awful, plagued by tepid demand for gasoline and weak refining margins. Chemicals, usually the smallest component of an integrated oil company’s results, saw a fall-off in demand due to the weak economy and are now seeing some recovery.

The bottom line: The integrated oils that dominate the S&P 500 Energy Index are the stocks you want to own when energy prices are weak, not when they’re on the move upward. I wince every time I read an article discussing the huge potential upside for energy and that proceeds to recommend only integrated oil companies.

Looking inside the Energy Index, the picture looks a good deal better than the overall numbers in the table suggest. For example, two of the three coal companies in the S&P 500 beat earnings estimates, both beat by wide margins; coal stocks have been among the top performers in the S&P 500 in recent weeks.

The average stock in the coal sub-sector of the S&P 500 has risen 16 percent since the end of September compared to a 3 percent gain for the S&P 500 and a 7.8 percent for the S&P 500 Energy Index.

The sector with the highest percentage beating estimates is Consumer Staples, mainly household products, food and beverage firms. This group is all too often shunned as a defensive sector that underperforms during market rallies. But that’s simply untrue; staples stocks have outperformed the S&P 500 in the year following each of the past two recessions.

Note that the staples have outperformed on the earnings front, but only a third of the companies comprising the sector have beaten on the top line. That’s due in part to cost-cutting.

But another underappreciated factor has been raw materials costs and pricing. Specifically, the prices of various inputs, including energy and agriculture prices, are down year-over-year; the third quarter of 2008 was a period of high commodity prices. But the best brand names in the sector have managed to hold onto price hikes instituted at the beginning of 2008 in part intended to combat then-rising commodity costs. This suggests a good degree of pricing power for firms with good brands.

We’ve been overweight staples in Personal Finance all year, and our favorites have actually beaten the S&P 500 despite the perception that they’re boring and defensive.

Source: 3Q Earnings Season: Steady Revenue Beats