Earnings season begins this week amid optimism that Corporate America has begun to emerge from the worst profits recession since the financial crisis.
After the closing bell on Monday, Alcoa Inc. is scheduled to unofficially kick off the quarterly torrent of financial results by U.S. companies.
And while the recent losing streak in earnings is expected to extend into a fifth quarter for the first time since 2008-09, the long-awaited recovery appears on track.
"The key here is not what gets reported this season, but expectations for what's ahead," said Jonathan Golub, chief U.S. market strategist at Royal Bank of Canada's investment arm.
Management commentary will be closely watched for confirmation that profit trends are improving for the first time in nearly two years, Mr. Golub said.
Collectively, S&P 500 companies are expected to post a decline in second-quarter earnings of 5.6 per cent from the prior year, according to FactSet.
U.S. profit growth first began to slow in the last quarter of 2014, and hasn't stopped since, with profits in the first quarter of this year having declined by 6.7 per cent, FactSet said.
Typically, that kind of deterioration of profits is fuelled by a broader economic downturn.
"The depth and breadth of the current earnings slump is quite rare outside of an economic recession," Paul Eitelman, a strategist at Russell Investments, said in a recent report.
Like most of the rest of the world, the U.S. economy has not exactly flourished, but it hasn't contracted either. Over the period of the profits recession, U.S. gross domestic product has grown at a rate of about 2 per cent a year.
When the real economy and corporate profits have diverged in the past, it has typically coincided with a strong U.S. dollar and low oil prices – two forces in abundance over much of the past two years.
Both of those boardroom headwinds have eased in recent months – at least up until the Brexit vote.
The slow rebalancing of the oil market saw crude oil nearly double in price from the worst of the energy crash, while the U.S. dollar declined materially through the first half of 2016 as expectations for rate hikes faded.
Hopes for a rebound in earnings have risen as a result. Second-quarter earnings season is widely expected to register at least a modest improvement from what could prove to be the bottom of the downturn in profits. This rally, according to UBS, is based on two assumptions: "recovery of commodity prices and stabilization in the U.S. dollar."
That narrative hit a snag when Britain voted in favour of leaving the European Union. The U.S. dollar spiked on safety flows, while crude oil gave back some of its gains.
"Now that Brexit is a reality, companies with European/U.K. exposure might guide down on expectations of weaker European growth, a stronger U.S. dollar and overall uncertainty, and [capital expenditure] guidance may similarly falter," Savita Subramanian, Merrill Lynch's head of U.S. equity and quantitative strategy, said in a note.
"We remain near-term cautious as the market is likely already anticipating an earnings rebound."
On Friday, the S&P 500 index came to within less than one point from setting a new all-time closing high. A gain of just 0.04 per cent on Monday would set a new record.
When stocks advance amid declining earnings, trading multiples go up. The forward price-to-earnings ratio for the S&P 500 is currently 16.6, which is considerably higher than both the five and 10-year averages, according to FactSet data.
But among other forces supporting equities, earnings trends should help fuel U.S. stock gains in the quarters ahead, Mr. Golub said.
"There will be plenty to push the stock market to higher highs through the remainder of the year."