Think of Wall Street as an obese person trying to find a healthy lifestyle. Then you'll begin to understand second-quarter earnings this year.
The stock market is in its crash-diet phase, depriving itself of calories in a desperate effort to shed pounds that for companies come in the form of excess operating costs. Corporate America has been following doctor's orders, going on a strict diet so the next phase can kick in.
For Wall Street, as for dieters, now comes the hard part. Companies that are beating earnings expectations with cost-cutting but soft revenue numbers now will have to convince investors that they have long-term strategies for real growth.
"You can lose weight by starving yourself, but that's not a sustainable strategy. You'll die," said Lawrence Creatura, portfolio manager and equity market strategist at Federated Clover Capital Advisors. "This is what you'd expect at this point in the cycle. It does represent good management on the part of the management teams that are successful, but it is not a permanent strategy."
Among the companies Tuesday joining the parade of beating bottom-line expectations with soft top-line numbers were Caterpillar , DuPont and United Technologies .
Investors were mostly upbeat about the companies as well as others in the same situation during this earnings round. Caterpillar shares in particular soared even though the company missed revenue expectations by more than 4 percent.
For some portfolio managers, the results were from the textbook of Recession Recovery 101.
"You're retooling. That's what you do in a recession," said Nadav Baum, managing director of investments at BPU Investment Management in Pittsburgh. "The top-line numbers are never strong until you cut costs. You retool and then some of the excess comes back in. Right now the companies are doing what they're supposed to be doing."
That has provided opportunity for investors who might have grown a bit leery of the market following its pullback from the March-to-June rally.
"It allows you to go up the risk ladder a little bit," Baum said. "You get a little more comfort level that the abyss is gone and now it's just about dealing with the recession and what are best vehicles to do that."
That's all well and good for now.
The theme of beating bad expectations has served the market well for most of the past nine trading days, coinciding with the beginning of earnings. Stocks have jumped about 8.5 percent in the period, but it won't lost forever.
Indeed, stocks vacillated Tuesday afternoon after rising earlier in the day. Remarks from Federal Reserve Chairman Ben Bernankethat were widely seen as cautious on the economy seemed to spook investors and served as a reminder of Wall Street's precarious position against the various headwinds.
Investors continue to look for real signs of growth, and they are apparent so far in only a handful of major companies, no matter how many beat analyst expectations.
"We are getting to the point where that little bit of production increase we begin to see has to translate into increased incomes and employment. If it doesn't, we'll stay in recession," said David Resler, chief economist with Nomura Global Economics in New York. "We won't be out of it just because the economy's generating positive growth."
In the meantime, though, investment advisors are using the opportunity to build up equity positions where they think the market will be the strongest.
Federated Clover's Creatura likes energy as a "call option on economic recovery," while he says to avoid consumer discretionary.
Baum, an avid backer of using exchange-traded funds to make broad risk-minimizing market moves, advocates ETFs like the SPDR Industrial, which is weighted heavily with bluechips including CNBC.com-parent General Electric, United Technologies and 3M.
Still, there remains an air of caution that until the revenue-driven top-line numbers get better, investors won't be ready to sound the all-clear signal.
"I would rather have the market move slower and have a chance to build a base than move the way it is," said Michael Kresh, president of M.D. Kresh Financial Advisors in Islandia, N.Y. "We're looking at momentum issues and we're looking at scared money jumping in, afraid to miss the end of the market. It's fine because we're making money, but it doesn't leave us more comfortable with being able to sustain this kind of level going forward."