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Cramer: Here’s How to View Earnings Season

To Jim Cramer, today's stock market is all about expectations.

CNBC

"After spending most of the day in the red, the averages closed up after expectations got adjusted," Cramer said of Monday's session, in which the Dow Jones Industrial Average eked out a gain of 2.38 points, or 0.02 percent, to close at 13,345.89 while the S&P 500 added 0.62 points, or 0.04 percent, to end at 1,433.81 and the Nasdaq rose 11.34 points, or 0.38 percent, to finish at 3,016.96.

"In this market, stocks are going up or down not because of revenue growth or the lack of it — that's the simplistic way the newspapers are explaining it — they're going up or down because of expectations with a capital 'E,'" Cramer explained, adding that the Street's expectations are either too great or too negative going into any given company's conference call.

Take Caterpillar, for example. The heavy machinery maker posted earnings that topped expectations, but revenue fell below estimates. It also cut its full-year guidance. Still, shares of the construction and mining equipment maker turned higher after a weak open.

(Read More: Caterpillar Earnings Beat, but It Cuts Full-Year Outlook.)

"If you only looked at where the stock went out today, you never would have guessed that Caterpillar reported a truly horrific quarter," Cramer said. "That's the power of a company lowering expectations to realistic levels that we all figure could be beaten after its stock had been laid to waste."

Cramer explained that in the past, Caterpillar executives tended to paint a rosy picture about the future, even amid it continues to face a challenging global economy. When Caterpillar executives finally got "realistically pessimistic," the market bought up its stock, he said.

The change in tone on the part of Caterpillar executives allows shareholders to no longer dread 2013, Cramer said. Now shareholders can approach the year ahead with "realistic, not great, expectations," he continued. In turn, he thinks it's a relatively low-risk play on a turnaround in the global economy and a stock worth considering whether or not economic conditions improve.

(Read More: Is Caterpillar's Stock Bottoming?)

Elsewhere in the market, Cramer noted Lam Research's stock was also able to move higher despite "horrid" numbers.

On the other hand, Google disappointed on several levels and on many key metrics, prompting its stock to close sharply lower Monday. Again, it was all about expectations.

(Related: Earnings Cliff Ahead? Profit Outlooks Are 90% Negative.)

So what's the bottom line?

"This earnings period is not about how companies are missing on the top line. That's simplistic analysis. It's about how the expectations were simply too great for many companies to beat," Cramer said, adding that the good news is that expectations have come down. "The bad news? Alas, we're only 30 percent through this earnings season with plenty of other companies with expectations too high and too hot for their stocks to handle."

Read on for Cramer's 10 Hottest Momentum Stocks

When this story was published, Cramer's charitable trust owned Caterpillar. CNBC.com contributed to this report.

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