Relief for investors as profit fears ease

Fears that profits at the largest US publicly traded companies would go into freefall in the first half of the year have eased, after a string of better than expected results from a range of corporations, including an energy sector hit by the oil price rout.

First-quarter earnings have now turned positive, removing some uncertainty facing US investors, after analysts had downgraded forecasts by the most since the financial crisis because of a sharp rally in the dollar and a drop in energy prices.

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For S&P 500 companies, blended earnings - a measure of quarterly results already announced and projections for the roughly 40 companies due to release figures over the coming month - are set to grow 0.2 per cent in the first quarter from a year earlier, against projections at the beginning of April for a fall of as much as 4.8 per cent, according to FactSet.

However, the earnings growth is expected to be the slowest since the third quarter of 2012. JPMorgan analysts note that growth was roughly 9.2 per cent in the first quarter when stripping out energy.

"You had a sort of typical pattern over the past five years where companies have done a good job of managing expectations," said Russ Koesterich, BlackRock's global chief investment strategist. "The dollar strengthened, which got people worried about international exposure."

Revenues, meanwhile, were lacklustre in the first quarter and are expected to deteriorate in the second, with estimates compiled by FactSet pointing to a 4.7 per cent year-on-year decline in S&P 500 sales.

"The S&P 500's strongest headwind this year is the lack of revenue growth," said Jack Ablin, chief investment officer of BMO Private Bank. "We are trying to figure out where the growth is. It's sort of like whack-a-mole - we're not seeing consistent growth across the globe."

Stocks have since returned to record levels, hitting the seventh closing high of the year on Thursday. However, strategists across Wall Street have cautioned that the recent moves have little to do with the earnings season, pointing instead to a calming in fixed income markets and a bounce in the euro and pound.

A so-called profit recession, in which earnings decline for two consecutive quarters, has also not been ruled out. The oil price rout is expected to cut nearly two-thirds off earnings at energy companies in the second quarter, dragging overall S&P 500 earnings 4.3 per cent lower.

David Bianco, a strategist with Deutsche Bank, noted that even with a "normal 3 per cent beat, second-quarter earnings per share will be down slightly to flat from a year ago".

However, a 43 per cent jump in Brent, the international oil benchmark, has helped to reduce some of the obstacles facing US multinationals.

Energy companies made up three of the five S&P 500 corporates to beat earnings by the greatest margin in the first three months of the year, the FactSet data showed, with both Cabot Oil & Gas and Consol Energy reporting profits twice as high as analysts had expected.

"A lot of the concern was the strength in the value of the dollar, and the dollar has started to retreat from the highs. And oil prices have started to move higher and there is the potential that they have bottomed," said Alan Gayle, senior investment strategist at RidgeWorth Investments.

"If that is the case, earnings expectations have to be revised."

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