NEW YORK, Aug 18: Earnings season is drawing to a close and the results raise a number of worrying questions about the economy's direction.

For the second quarter, the percentage of companies beating revenue forecasts was the lowest since 2009. For every company that gave a positive outlook, nearly five companies gave negative outlooks, Thomson Reuters data showed.

Third-quarter earnings estimates are down sharply, and now show a year-over-year decline of 1.8 per cent, which would be the first quarter of negative growth in three years. Overall earnings growth for the second quarter looked pretty solid - 8.4 per cent.

But a charge taken by Bank of America at this time a year ago skews everything. Take them out, and growth was just 3 per cent, according to Thomson Reuters data.Investors said the results raise red flags for coming quarters. Early in expansions, earnings tend to strengthen as cost-cutting efforts boost profits - but revenues tend to catch up as demand increases later in the cycle. That hasn't happened in an expansion nearing its third anniversary.

“What this is telling us is that the economy is slowing down, and that doesn't bode well for the bullish earnings expectations, which we are so used to,” said Pankaj Patel, quantitative research analyst at Credit Suisse in New York.

“Generally there's always a gap, but this gap is much wider.” Despite this, US stocks have held up. The S&P 500 is just a few points from four-and-a-half year highs. With results in from 95 per cent of the Standard & Poor's 500 companies, just 41 per cent have beaten revenue expectations, well below the 64 per cent average of the last four quarters, Thomson Reuters data showed.

US companies have been hit on several fronts: a recession in Europe, slower growth in China and a lack of momentum in the US economy. According to a recent Reuters poll, gross domestic product likely expanded at a 1.5 per cent annual rate between April and June, after rising 1.9 per cent in the first three months of the year. While much of the economic news is not new, the number of companies posting revenue shortfalls was a surprise in this period. That has happened even though 68 per cent of companies beat earnings expectations, the data showed.

Companies have done that by holding down costs and consolidating businesses rather than spending, a fact reflected in the nation's stubbornly high unemployment rate.

Sectors with the worst revenue misses for the second quarter include materials, industrials and utilities, with all three showing a more than 70 per cent miss rate on revenue, Thomson Reuters data showed.

“Revenues have not grown in proportion with earnings. That's to be expected early in the recovery, but now we've matured.

We're well along in the cycle, and revenues are still trailing,” said Michael Gibbs, co-head of Equity Advisory Group at Raymond James in Memphis, Tennessee.

Among industrials that missed on revenue for the quarter was conglomerate United Technologies, which also warned that full-year earnings would be roughly flat with 2011 due to the weak European economy.—Reuters