Second-Quarter Earnings Cheer Sets High Bar

Updated from June 24

The best preannouncement season on record finally may be translating into better stock returns for investors, but some analysts worry that the good news won't continue.

For the first time since Thomson First Call started tracking earnings data, positive preannouncements for the second quarter actually have outweighed negative warnings. Indeed, 45% of the 203 companies that have provided previews of the second quarter so far expect to beat expectations, while just 36% expect to miss the numbers. About 19% expect to meet estimates.

The optimistic news has led to the highest upward-earnings revisions on record, with First Call now looking for 26% earnings growth in the second quarter, up from just 14% three months ago. In the first quarter, earnings rose 27.5%.

Although the prospect of an interest rate hike by the Federal Reserve next week and the impending handover of sovereignty to Iraq have kept investors on edge recently, the S&P 500 has climbed about 6% since May 17, and the Nasdaq is now back in positive territory for the year after a respectable rally Tuesday.

Still, some analysts are increasingly concerned about what lies beyond the second quarter. David Joy, vice president of capital markets at American Express Financial Advisors, said earnings growth should slow down in the third and fourth quarters as comparisons become "increasingly difficult."

"The going will only get tougher for corporate operating performance," he said.

First Call expects earnings to rise 14% in the third quarter and 15% in the fourth, a marked deceleration from the first half of the year.

Some companies that have released solid preannouncements have seen little effect on their stock prices, partly because of concerns about whether the gains are repeatable. Intel's(INTC Quote - Cramer on INTC - Stock Picks) chief executive, Craig Barrett, said the firm might be headed for a record quarter in the three months ended June 30. Yet shares are up only a small amount.