Earnings expectations: Why most big companies beat the Street's predictions

With earnings season under way, I was surprised to learn from an AP article that 81 percent of companies that have reported so far this quarter have exceeded Wall Street's earnings expectations. Are these companies doing so spectacularly well in their businesses despite the worst recession in 70 years? Absolutely! As long as you think that their business is influencing Wall Street's earnings expectations.

By that measure, public companies have been remarkably successful. The AP reports that 81 percent of the first 199 S&P 500 index companies to report earnings came in above expectations on their third-quarter 2009 results. But it's not just this quarter -- over the past two years, 65 percent of earnings reports have beaten estimates. And after last fall's financial crisis, companies beat expectations at about twice the rate as they missed in the following two quarters.

Why is this happening? It's simple, really.