The latest profit reporting period has broadly met expectations, Morningstar head of equity strategy Ross Bird says. But earnings forecast upgrades for 2011/12 remain scarce, with downgrades still prominent.

As Investor Weekly published, 163 companies that Morningstar analysts research had reported. Thirty-three of them beat forecasts, 98 were in line and 32 were below.

Morningstar considers a company's earnings result and guidance statement when assessing if it beat analyst expectations, a methodology that gives important clues about the reporting period's strength.

"By and large, the overall profit results are in line with our expectation. So far, I would give this reporting season a B. A feature has been more earnings volatility relative to expectation, that is, more companies beating or missing forecasts and fewer in line compared to previous years," Bird says.

He says several themes emerged during this reporting period.

"The strong Australian dollar is clearly causing problems for companies with offshore operations. And some are more affected by economic weakness in the United States than others," he says.

"The mining sector was interesting, with BHP Billiton beating our forecasts and Rio Tinto missing our forecasts even though it reported record profits.

"The take-out is that not all resource companies are swimming with the same tide."

Another trend is lack of earnings visibility, he says.

"We have seen more companies defer giving earnings guidance until their annual general meeting later this year, or providing no guidance at all. Others said it was simply too hard to give guidance right now. The result is the earnings outlook for FY12 is less visible than it was for FY11, which will make it harder for analysts to forecast profits," he says.

Only 15 of 163 companies received an upgrade in their earnings forecast for the 2012 fiscal year from a Morningstar analyst, he says. 

This figure could rise as analysts digest more profit announcements, but the trend of profit downgrades outweighing upgrades does not look like ending any time soon. "I expect to see more downgrades to forecast profits in FY12," Bird says.

There is some good news. The 20 largest stocks have lifted dividends on average, and Bird forecasts an average dividend yield of about 5.1 per cent over 12 months and 5.6 per cent the year after for companies Morningstar researches.

As for the market, he says it is difficult to give an end-of-year target for the S&P/ASX 200 until some big issues become clearer.

"I think anybody who puts an exact number on where the market will finish the year is guessing until we get more indication on how the European debt crisis will play out and whether the United States will slip back into recession," he says.

"Fundamentally, the Australian market looks cheap, but that does not mean it cannot get cheaper if earnings continue to be downgraded."

A reporting period that broadly met expectations is probably the best the market could have hoped for, given equities volatility and global economic problems.

But until the rate of earnings downgrades slows and more upgrades emerge, it is hard to see the local market making huge strides in the short term.