Look for a lot of winners when companies report their first-quarter earnings.
The companies in the Standard & Poor's 500 index have surpassed analysts' profit expectations for two years, or eight straight quarters. Some analysts say they will make it nine straight this earnings season, which begins Monday with a report from aluminum producer Alcoa Inc.
"The longer it persists, the more meaningful it is," said Adriana Posada, senior portfolio manager with American Beacon who oversees $18.8 billion in mutual fund and pension assets. "There's a lot more confidence that the economy is in fact improving when earnings continue to surprise" with better-than-expected results.
Credit Suisse analysts wrote in a recent report that they expect companies in the S&P 500 will report total earnings per share of $22.66. That's 3 percent above what analysts across the industry were expecting at the end of the first quarter. Over the last eight quarters, earnings have beaten expectations by an average of 7 percent.
The difference may sound small, but stocks are priced on the assumption that earnings will meet expectations. If results beat forecasts, expect stocks to go up.
Last earnings season, for example, timber company Weyerhaeuser Co. jumped 3 percent the day it reported adjusted earnings per share of 10 cents. That was double analysts' expectations.
But the stock market's gains aren't uniform during earnings season, J.P. Morgan strategists wrote in a report. They looked at returns for the S&P 500 in the first half of an earnings month, such as April or July, versus the remainder of the month going back to 2009. In the first half, when investors are surprised by the stream of better-than-expected results, they quickly buy. But beating expectations gets less of a reaction later in the month.
Last earnings season, for example, the S&P 500 rose 2.8 percent in the first 10 trading days of January. But the rally fizzled, and the index slipped 0.6 percent over the back half of the month. The same thing happened a year ago. The S&P 500 jumped 3.6 percent in the first 10 trading days of April 2010, but it dropped 2.1 percent over the last 11 days.
Analysts expect most of the growth this earnings season to come from companies that produce metals and other basic materials. They say Alcoa will report earnings per share of 27 cents, for example, according to a survey by FactSet. That's more than double its earnings of 10 cents per share from a year ago. Alcoa and other materials producers are benefiting from the global economic recovery, which has factories demanding more raw materials.
Other industries whose results are closely tied to the strength of the global economy are also expected to show profit gains of at least 10 percent, such as energy and industrial companies. Analysts expect Exxon Mobil Corp. to report earnings of $1.92 per share, up 44 percent from a year ago. It benefited from higher crude oil prices, which jumped above $100 per barrel during the quarter after starting the year at $91.38.
Total revenue growth for the S&P 500 should top 10 percent for the first time since 2006, S&P senior index analyst Howard Silverblatt expects. Most of the growth is coming from bigger spending by companies, rather than by consumers.
"As sales increase, and at this point 2011 looks like a double-digit gain, companies will commit to producing more, adding a few hours, then maybe a shift, and at some point eventually hiring," Silverblatt wrote in a recent note. That could lead to higher consumer spending.
Much of the revenue growth for big U.S. companies is also coming from overseas customers, rather than domestic ones. The dollar's drop against other currencies through the first quarter increased the value of sales made overseas.
To be sure, first-quarter earnings for some companies are under threat because of the earthquake that struck Japan in March. High oil prices during the quarter may also hurt. Delta Air Lines said last month that fewer flights to Japan and more expensive jet fuel will cut its 2011 profit by up to $400 million.
Analysts also forecast first-quarter earnings to weaken for some industries, including telecommunications and utility companies.
Investors had worried that the start of earnings season would be overshadowed by a government shutdown. But that risk was averted late Friday when lawmakers agreed to a last-minute deal to cut about $38 billion in federal spending. The agreement means economic reports will be released as scheduled this week, including updates on international trade, consumer prices, retail sales, industrial production and business inventories.
AP Business Writer Chip Cutter contributed to this report.