Feeble U. S. earnings expectations set stage for stock gains

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Source:   —  April 07, 2016, at 3:31 PM

That hurdle may be unusually simple to clear this quarter, as analysts, who saw oil prices and stocks collapse at the start of the year, went really negative on the first quarter of two thousand sixteen.

When Wall Street'south quarterly earnings season kicks in to high gear following week, hundreds of companies will compete for the bragging rights that arrive from "beating the Street" - showing revenues and profits that are higher than analysts expected.

That hurdle may be unusually simple to clear this quarter, as analysts, who saw oil prices and stocks collapse at the start of the year, went really negative on the first quarter of 2016.

While the majority of companies typically beat forecasts, the bar for positive surprises may be even lower this time around, with analysts expecting profits of south&P five hundred companies to be down 7.4 % from a year ago, according to Thomson Reuters data.

With a handful of early reports coming in well over expectations and some proof of stability in two company-hurting trends - falling oil prices and a rising dollar - some strategists are predicting sufficient positive news in an otherwise negative earnings season to boost stocks at minimum in the brief term. In order words: First quarter earnings will be bad, but maybe not that bad.

"For right presently there'south more of a chance of a positive astonishment than a negative astonishment in earnings, and to the extent that positive surprises are generated, that creates buying," said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.

To be sure, the first-quarter reports aren't expected to be pretty. A decline would label the third quarterly profit fall in a row, Thomson Reuters data shows. The energy sector, expected to have its first quarterly loss in at least ten years, will be the biggest drag.

But by the finish of the quarter some of the biggest negatives on company performance seemed to have abated.

U. south. oil prices, which had fallen to a low of about $26 a barrel by mid-February, had stabilized close in March, providing some hope to investors in energy companies. [O/R]

At the same time, the dollar, which had hit U. south. corporations tough as it rose sharply in both two thousand fourteen and two thousand fifteen, eased in the first quarter, with the U. south. dollar index . DXY down 4.one % in that period.

The dollar'south strength still could hit U. south. exporters, but its overall impact is going to be a lot less this earnings period relative to the latest few quarters, said Dan Suzuki, senior U. south. equity strategist at Bank of America Merrill Lynch in New York. He well-known that roughly one-third of S&P five hundred revenues arrive from exterior the United States.

Multinationals stand to benefit the most, he said.

COLLAPSE IN EXPECTATIONS

Some upside has already been built in to share prices.

The S&P five hundred Index is trading at about 16.6 times its components' earnings over the next twelve months, well over the long-term average of 14.7, according to Thomson Reuters data.

But roughly eighty % of S&P companies that have already declared first-quarter results are beating expectations. That's higher than usual, and includes powerful performance from a diverse grouping of companies, including Lennar Corp (), FedEx Corp () and Adobe Systems Inc ().

Furthermore, analysts who started the year expecting a 2.3 % expand in S&P five hundred earnings may have gone overboard with downward revisions as the gloomy quarter unfolded.

It was "an absolute collapse in expectations," said Jonathan Golub, chief equity strategist at RBC Capital Markets in New York.

The drop in analysts' views between Jan. 1 and presently was nearly triple the typical 3.5 % preseason decline, he said, and "about as horrible as we've ever seen, with the exception of the period going into the '08-09 crisis."

For the first time since the second quarter of two thousand eleven, sales are expected to keep the line better than earnings. S&P five hundred sales are expected to have fallen just 1.2 % in the quarter.

In the end, investors may get just sufficient excellent news to keep a positive spin on an otherwise "pig of an earnings season," Golub said.

(Editing by Linda Stern and Matthew Lewis)

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