after a very strong first quarter earnings results for the second quarter look even better as of the end of last week according to factset 9 of 10 companies 91 percent had reported of these almost 7 of 8 87 percent beat expected earnings we haven’t seen numbers like these since we first began tracking this data in 2008 the news is just as good—and just as surprising—when we look at absolute performance so far for the second quarter earnings are up by almost 90 percent 893 percent which is well above last quarter and the highest growth since 2009—and substantially better than the 63 percent analysts expected at the end of the first quarter also note that this outperformance is after analysts upgraded earnings estimates given the strong first quarter for both expectations and absolute performance this is an extraordinary gap between what analysts expected and what companies produced where is the growth coming from the growth was widespread financials were the largest contributor to earnings growth with the sector as a whole showing a blended earnings growth rate of 1768 percent almost double expectations technology was the secondlargest contributor up by 466 percent with the usual suspects leading the charge communications was the thirdlargest contributor with growth rising to 758 percent other sectors showed significant gains as well in all the 87 percent of companies beating expectations was well above the fiveyear average of about 75 percent the average beat was 17 percent well above the fiveyear average of 78 percent more companies are beating estimates and beating them by more no wonder the market has been responding but why have companies been outperforming so much and what does that outperformance tell us about the rest of the year on an absolute level one reason for the outperformance against expectations has been that analysts simply underestimated the recovery for the second quarter in a row not wanting to get caught short again on an absolute basis analysts have pushed estimates up for the rest of the year on a relative basis however much of the strong growth has been due to how much demand collapsed in the second quarter of 2020 rather than absolute performance while performance has been strong it looks especially strong measured against that low standard so while analysts are upping their absolute earnings numbers going forward the yearonyear comparisons will look less favorable right now expectations are for earnings growth of 278 percent in the third quarter and 213 percent in the fourth quarter for a total 2021 earnings gain of 42 percent that would be a great yearonyear result if we get it but as noted those large percentage gains are largely due to the collapse of demand through 2020 when comparisons start to normalize next year even as earnings continue to grow on an absolute basis the reported growth rate is expected to drop back to normal levels of approximately 10 percent this result however will be something to celebrate as it signals a return to normal the real question though is should we believe these numbers should we believe the numbers let’s start with the top line salesrevenues seven of eight companies 87 percent are beating expectations so far for the first quarter both the number of beats and the amount of the beats are at the highest level since records began in 2008 more this very strong performance comes from a second quarter that was economically strong but that also had significant weaknesses this suggests that companies have learned how to keep selling in a pandemic environment and will likely take advantage as the economy improves it is a very positive sign going forward as the economy continues to recover and grow but as we move down to earnings the news is even better earnings growth is expected to significantly exceed revenue growth for the next three quarters as companies scale their operations with the recovery this expectation looks plausible as companies will benefit from rising consumer income and greater internal efficiency demonstrated by the alltimehigh net profit margins reported last quarter companies are both selling more and making more money from each sale the strong expectations are rooted in actual performance—performance that is likely to continue the economy is growing and companies are selling more which is great but not really news the news is how much more companies are making and why what this quarter’s earnings data shows is that companies are able to wring out more profits from every dollar of sales and that is a good sign for markets as sales continue to rise analysts are still working on quantifying that growth as investors we can see that with valuations holding steady higher margins and earnings should give us more market upside through the rest of the year that is a good message from this quarter’s earnings season