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Companies are beating earnings estimates—but don’t be fooled

A trader works on the floor of the New York Stock Exchange.
Getty Images
A trader works on the floor of the New York Stock Exchange.

Are companies beating earnings expectations? Well, yes and no.

All eyes are on earnings this week, as investors eagerly await to find out how well American companies did in the first quarter of 2014. So far, fewer than 20 percent of S&P 500 companies have reported. But already, a few disturbing trends are emerging.

Of the 85 S&P companies that have already reported their first-quarter earnings, 67 percent have beaten analyst estimates on the earnings side, and 51 percent have beaten on the revenue side, according to FactSet. That sounds pretty good—until one considers that over the past four years, 73 percent of companies have tended to beat earnings estimates, and 58 percent have tended to beat revenue estimates.

It's not just the number of companies beating—the aggregate amount of earnings has been similarly light. Companies have reported earnings 2.0 percent above expectations, which is well shy of the 5.8 percent "surprise percentage" that companies have tended to report over the last four years.

The overall sales numbers have also been soft, with companies reporting revenue 0.3 percent below expectations in aggregate.

At this point, S&P 500 companies look to report a year-over-year earnings decline for the first time since the third quarter of 2012. By combining the earnings that have already been reported with the analyst estimates of the S&P 500 earnings we have not yet seen, FactSet senior earnings analyst John Butters arrives at a "blended" earnings decline estimate of 1.3 percent.

Read More What this week's earnings will say about the economy

"This is not a strong start to the earnings season," Butters told CNBC.com. "Where we stand right now, we're seeing fewer companies beating than we'd expect, and we're still looking at a year-over-year earnings decline."

Read More Here's what will drive stocks this week

But for trader Jim Iuorio of TJM Institutional Services, we don't need to see out-of-the-park earnings in order for stocks to go higher.

"The earnings picture is mixed, and mixed is fine. As long as it is not slapped in the face by these earnings, the stock market can find other ways to rally," Iuorio said.

At this point, the results Iuorio is watching most closely are those of momentum stocks like Netflix, which is set to report after Monday's close.

"Netflix is the poster child for momentum names. And if they do well today, that might be a signal that momentum names are calling a cease fire," Iuorio said. "Now, if the momentum names bounce, they could bounce significantly. That will make Nasdaq futures will be a better way to go than S&P futures."

Brian Stutland of Equity Armor Investments agrees that the earnings picture "isn't horrible," but he says that because results "haven't been exceptional, that's going to keep the market choppy. I don't think you'll see a runaway market like you saw last year."

That could be good news for traders, he said.

"I think the trader will be more of a winner in 2014 versus in 2013—when the best move was just to buy and close your eyes."

—By CNBC's Alex Rosenberg.

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