The markets as usual have run ahead of the macro. Fundamentally, nothing much has changed in the economy, notwithstanding a cash reserve ratio cut by the Reserve Bank of India and a slew of policy initiatives from the government. Thus, earnings will take some time to catch up with stock prices, which have shot up by 5% in the past fortnight.

In any case, earnings downgrades are still happening despite talks of green shoots and revivals. “The MSCI India Earnings Revision Index, a key measure of sentiment, has been negative and on a downward trend (more downgrades than upgrades) for the last four months, indicating more downgrades than upgrades," Religare Capital Markets Ltd points out in a recent note.

Earnings of Sensex firms alone have been reduced by about 1% in the September quarter. Although the pace of such downgrades has come down, the forthcoming earnings will likely follow the trend seen in the June quarter.

Brokerage firms are forecasting a slower pace of revenue and profit year-on-year growth compared with June. Edelweiss Securities Ltd, for instance, is predicting a 14.6% revenue growth for the firms it tracks, compared with 18.3% in the June quarter and 20.9% in September 2011. Angel Broking Ltd has forecast a 13.3% increase in profit after tax for companies it covers, compared with a 16.1% gain in the June quarter.

Operating margins, too, are likely to get squeezed as a falling rupee that drove up effective commodity prices for importers takes its toll.

But with markets going up, does it mean that investors are expecting earnings to pick up in the next couple of quarters? That appears unlikely as well given that macro concerns still remain.

The latest set of economic indicators do nothing much to allay these concerns. The HSBC purchasing managers’ index, which remained stagnant in September, doesn’t hold out any hope.

In July, the index of industrial production grew just 0.1%. Capital goods shrank 5% and an interest rate cut that could potentially revive investment demand is some time away. The data also show that consumption expenditure is taking a hit. With inflation also likely to remain at around 7% this year, demand pressures will persist and dampen growth.

Still, a host of factors that hold out hope are driving up sentiment. The fact that the government has delivered on some reforms and might tighten its spending is leading to expectation that the central bank will cut rates in the near to medium term. Secondly, the rupee is near a five-month high, which will be a relief for a country dependent on imported raw materials.

But both are iffy trends and their actual impact on company income statements will take time to materialize.

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