The U.S. first quarter earnings season kicks off on Tuesday, when Alcoa Inc. reports its results after markets close. Analysts believe that the big growth in earnings is gone, and what's left is growth that is far more aligned with sales and economic activity, rather than cost cutting.
As well, last quarter's reporting season is weighing on sentiment, given that the number of companies beating analysts' earnings expectations was relatively low. No wonder analysts see earnings for companies within the S&P 500 rising just 3.3 per cent in the first quarter.
However, Greg Harrison, corporate earnings research analyst at Thomson Reuters, argues that strong earnings from pre-season reports point to better-than-expected results: Among the 28 companies within the S&P 500 that have reported their results ahead of Alcoa's, 79 per cent of them topped expectations. That's far above the historical long-term "beat rate" of 62 per cent.
"Historically, the strength of earnings preseason results has predicted the rate at which companies have reported better-than-expected results in the entire earnings season, about two-thirds of the time," Mr. Harrison said in a note. "That suggests there is a strong likelihood that a significant number of companies will announce results that exceed analysts' estimates in the coming weeks."