Are Corporate Earnings Being Gamed?

Are corporate earnings really as great as the executives at the helm and Wall Street want us to believe?

Over 70% of S&P 500 (^GSPC) companies that have already reported beat analysts’ earnings estimates during the fourth quarter. Furthermore, 66% reported higher sales revenue, which is above four year averages, according to FactSet. Equity permabulls say this is wonderful news.

Here’s the conundrum: Companies talked down 2013 earnings expectations to such low levels, the hurdle rate for “beating” depressed earnings guidance was a virtual lock.

WATCH: QE Aftermath: Will Asset Prices Deflate?

The total U.S. stock market (NYSEARCA:VTI) rose 33.45% last year as financial markets celebrated unexpected higher earnings. Sadly, too many investors are buying and selling based off headlines and beat rates without a basic understanding of the actual story behind the numbers.

So far this year, companies are up to the same old gimmicks.

For Q1 2014, the rate of pre-announced lower earnings expectations is easily outpacing positive guidance 66 to 16. When will the stock market wake up from its dream like trance and see right through the manipulated earnings guidance game?

Isn’t purposely depressing earnings expectations to juice up stock prices a form of market manipulation? Why hasn’t the Securities and Exchange Commission investigated the matter? Do they not care?

S&P 500 (NYSEARCA:IVV) industry sectors with the highest year-over-year earnings growth were led by financials (25.4%) (NYSEARCA:XLF), materials (25.2%) (NYSEARCA:XLB), and industrials (16.8%) (NYSEARCA:XLI).

The quality of corporate earnings should always be a major concern for the prudent investor. How believable are a firm’s reported figures? And to what degree are the numbers being skewed by artificial measures? Is management acting true and being honest?

The next time your favorite company beats analysts’ earnings estimates, ask why.

The ETF Profit Strategy Newsletter uses technical, fundamental, and sentiment analysis along with market history and common sense to keep investors on the right side of the market. In 2013, 70% of our weekly ETF picks were gainers.