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

Thu Apr 7, 2016 7:04am EDT
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By Caroline Valetkevitch

NEW YORK (Reuters) - When Wall Street's quarterly earnings season kicks in to high gear next week, hundreds of companies will vie for the bragging rights that come from "beating the Street" - showing revenues and profits that are higher than analysts expected.

That hurdle may be unusually easy 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 S&P 500 companies to be down 7.4 percent from a year ago, according to Thomson Reuters data.

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

"For right now there's more of a chance of a positive surprise than a negative surprise 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 are not expected to be pretty. A decline would mark 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 10 years, will be the biggest drag.

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

U.S. oil prices, which had fallen to a low of about $26 a barrel by mid-February, had stabilized near $40 in March, providing some hope to investors in energy companies. [O/R]   Continued...

Traders work on the floor of the New York Stock Exchange (NYSE) April 5, 2016. REUTERS/Brendan McDermid