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Investors see warmth beyond a frigid earnings outlook

A long, cold winter has put a chill into hopes for the coming earnings season, but markets are drawing strength from signs that consumers and businesses both look ready to spend.

On Tuesday, Alcoa is scheduled to report its first-quarter results, kicking off a round of corporate reports tarnished in advance by lowered expectations.

According to FactSet, estimated first-quarter earnings for S&P 500 companies are expected to fall by 1.2 per cent, marking the first year-over-year decline since the third quarter of 2012.

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Ninety-three companies in the S&P 500 have issued negative earnings guidance compared to just 18 companies that have revised to the upside, the second most pessimistic outlook FactSet has registered since it began tracking the data in 2006.

But behind the lousy headline figures are many encouraging signs.

By the end of the quarter, the trends turned friendly in many sectors. Earnings are set up for a strong back half of the year as both the U.S. consumer and the corporate sector have money to burn.

"All these things seem to be rebounding quite strongly once you get past the data for February," said Don Vialoux, research analyst at Horizons ETF Management Canada.

Still, expect to see company after company cite bad weather as the culprit for lost profits, just as they did in the quarter prior.

The weather really was that bad.

"No matter how you measure it, in terms of heating degree days, or number of workers away from work due to weather, it does legitimately seem to be a weather story," said Eric Lascelles, chief economist at RBC Global Asset Management.

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"The telling variable was that consumer confidence was completely unaltered. It was an inability to spend as opposed to an unwillingness to spend. As the weather improves, we likely get some of that back."

That delayed business helps explain why a rash of profit warnings has failed to dent investor sentiment. The companies issuing negative guidance have seen their shares actually increase by an average of 0.2 per cent, according to FactSet. And since bottoming out in early February, the S&P 500 has risen by 7 per cent, just shy of an all-time high.

There are other good reasons investors are willing to give the corporate sector a pass on an unimpressive earnings season.

First, the damage wrought by the weather was concentrated in January and February. By March, the indicators had improved.

Auto sales, for example, inched higher in March after a rough start to the year. U.S. jobs growth and manufacturing also picked up.

Also of comfort to investors is the expectation that earnings for 2014 are heavily weighted to the back half of the year. Earnings growth is estimated to reach 10.9 per cent in each of the year's last two quarters, FactSet said.

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While last year's stock performance was primarily driven by rising valuations as investors rediscovered an appetite for risk, this year's market will require strong earnings if the good times are to continue, Mr. Lascelles said.

"Fortunately, it looks like the economy is poised to deliver."

Also lending support is the U.S. Federal Reserve, which last week comforted investors who became temporarily concerned that interest rate hikes could come sooner than expected.

That reassurance restored the enduring appeal of stocks over bonds.

"The simple debate of stocks versus bonds is still one that stocks can win," Mr. Lascelles said. "It's not a knockout like it was a few years ago as yields have risen and valuations have gotten loftier, but it's still the case that the return on the stock market materially exceeds the bond market over the next several years."

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About the Author
Investing reporter

Tim Shufelt joined the Globe and Mail in August, 2013, primarily to cover investments for Report on Business. Prior to the Globe, he worked as a staff writer at Canadian Business magazine, a business reporter at the Financial Post, and covered city news and courts for the Ottawa Citizen. More

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