Beating expectations has become quite commonplace among the companies held in the Essential Growth Portfolio. The second quarter’s earnings reporting season is a little more than half over for us and the scorecard looks pretty good. 15 companies have exceeded consensus earnings estimates, four have met expectations and three reported disappointing results.

Beneath these generally cheery headline results though lays a sign that this harsh recession is far from gone. With a few notable exceptions, companies have been able to beat expectations by cutting expenses more than analysts had expected. Revenue declines are still the norm and most companies have issued guarded outlooks for revenue growth in the coming quarters. The exceptions have been in health care supplies (typically recession-resistant) and outsourcing (helping others cut costs).

As a result of the top line strain, most companies intend to hold very tight on their expense controls – limiting hiring, restricting raises and bonuses, reducing travel expenses, deferring capital expenditures – until they see clearer signs that demand for their goods and services is accelerating.

We continue to believe that the markets have run well ahead of the underlying economic fundamentals. While it is certainly encouraging that the economy is no longer shrinking as quickly as it was late last year, we believe that strong economic growth in the near term is very unlikely. We could get some growth as companies restock inventory this fall, after having drawn down inventories to very low levels. However, this bump is likely to be temporary as most companies will be slow to rehire workers, instead raising the average work week from its current low level and supplementing those hours with overtime as necessary. Those who stay employed will continue to pay down debt and increase their savings.