Cross-posted at River Twice Research.

With a slew of major companies reporting earnings so far, it's clear that expectations were severely skewed to the negative. Once again, Wall Street analysts overshot - this time to the downside. The substantial margin expansion reported by Intel; the higher-than-anticipated profitability of IBM; and the blow-out quarters of Goldman Sachs and JP Morgan all stand in contrast to sentiment just a few weeks ago, which was grim and getting grimmer. So what happened?

First, the robust results of some of the banks so far is the result of trading revenue and changes in accounting rules rather than a sudden improvement in losses from bad loans. Still, income is income, and the more they generate, the easier it will be to absorb those losses from consumer, commercial and business loans that will continue to go sour for some time.

Second, the companies that have reported strength for the most part have significant portions of thier business outside the United States - IBM alone derives nearly 25% of its revenue from Asia and almost two-thirds from non-US operations. Intel has a similar exposure. Or take a company like Yum Brands, with its vibrant Kentucky Fried Chicken franchise in China. The market didn't love its recent report, with weak sales at Taco Bell in the US, but it is still expanding rapidly and at high-profit in China. In short, there are pockets of the global economy that are doing considerably better than the United States and parts of Europe, and those companies exposed to those regions have been benefiting.

Finally, while subsequent earnings of consumer companies may disappoint relative to what we've seen the past week, it's clear that companies operating globally have been able to escape the worst of the economic downturn at the expense of labor and jobs. They can go anywhere and to some extent shed anyone in order to maintain margins, and that means that they don't necessarily track the economic trends of any particular country and can often do substantially better than any national economy. That should be a lessen in both economics and investing: looking to economic data as an indicator of corporate profitability is a mistake, and that has been starkly evident in the earnings reports so far.

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