Corporate earnings should top forecasts again in the first quarter, but the extent of the stock market's rally means investors are expecting a lot from companies.

Standard & Poor's 500 <.SPX> companies' first-quarter profits are seen up 36.8 percent versus a year ago, which would be a second straight quarter of year-over-year profit growth, according to Thomson Reuters data. The fourth quarter marked the first of year-over-year gains since 2007's second quarter.

We're going to see a healthy number of positive earnings surprises, said Fred Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. We're seeing stronger economic data than what we expected, and that should translate into a little bit better revenue growth.

Still, investors are anxious to see if companies can beat expectations enough to push stock indexes even higher. The S&P 500 now is up 75.4 percent from its March 2009 closing low.

But strategists say much of the enthusiasm for quarterly profits may already be factored into lofty stock prices.

Stocks could be in danger of repeating the previous earnings period, when investors would sell even after strong reports. The S&P 500 lost roughly 3 percent during earnings season.

I don't think (earnings) will move the needle, said Joseph Battipaglia, market strategist at Stifel Nicolaus in Yardley, Pennsylvania.

That's not a bad thing. It's just that we've gotten away from a worst-case scenario to what I would consider a best-case scenario, and now it's a lot harder to justify higher stock prices.

Of late, momentum indicators and short-term moving averages suggest the major indexes are becoming overextended.

The Dow Jones industrial average <.DJI> and the S&P 500 are at 18-month highs, and the Dow has come close to hitting the 11,000 mark.

Historically, the market performs better in the off-earnings season than during earnings, according to Bespoke Investment Group of Harrison, New York.

The S&P 500 is up 6.8 percent since the last earnings season ended.


Dow component Alcoa Inc kicks off the reporting period with results after Monday's close. Results are also expected next week from tech heavyweights Intel Corp and Google , as well as from General Electric .

Pre-announcements heading into the reporting period show more positive outlooks than average and fewer negative ones, indicating company executives feel confident about results and analysts' estimates.

The negative-to-positive pre-announcement ratio is at 1.3, well below the long-term average of 2.1, said John Butters, director of U.S. earnings for Thomson Reuters.

The news follows a strong fourth quarter in which 9.7 percent of companies raised outlooks and 5.2 percent lowered outlooks -- the widest spread since 2001 -- in another sign of improved confidence, according to Bespoke.

First-quarter revenue is seen rising 10 percent, which would be an improvement from 8 percent growth in the fourth quarter, Thomson Reuters data showed.

While drastic cost cutting has let a much higher-than-average percentage of companies beat analysts' earnings estimates in recent quarters, revenue has been slower to recover.

But some 70 percent of S&P 500 companies beat revenue estimates for the fourth quarter -- up from 59 percent beating estimates for the third quarter.

On earnings, 72 percent of companies beat estimates, down from a record 79 percent in the previous quarter but still well above the 61 percent in a typical quarter, Thomson Reuters data showed.


The improved economic outlook is driving higher expectations. Non-farm payrolls added jobs in March, according to government data released on Good Friday, while another report this week showed the huge U.S. services sector grew at its fastest pace in nearly four years.

On Thursday, retail chains posted a record rise in monthly same-store sales for March.

If you look at the stocks (of high-end retailers) ... they kind of indicate spending has come back. We definitely saw it in the fourth quarter, said Wall Street Strategies analyst Brian Sozzi in New York.

Shares of Tiffany's are up 192 percent since the S&P 500's 12-1/2-year closing low hit on March 9, 2009.

Many S&P sectors are still benefitting from easy year-over-year comparisons, Butters said.

The first quarter of 2009 marked the weakest period for S&P 500 earnings since the first quarter of 2002, while the fourth quarter was the worst since at least 1998, when Thomson Reuters started tracking the data.

What a difference a year makes.

Sectors expected to lead this year's first-quarter gains are financials, estimated to have a 205.2 percent jump in earnings from a year ago, followed by materials, seen posting a 176.4 percent rise, and consumer discretionaries, estimated to report a 114.8 percent gain.

There's not been a lot of profit warnings. I think the markets are expecting good things, said Nick Kalivas, vice president of financial research and senior equity index analyst at MF Global, in Chicago.

(Reporting by Caroline Valetkevitch; Additional reporting by Leah Schnurr; Editing by Jan Paschal)