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Buckle up -- first-quarter earnings look to be awful

Investors are nervously awaiting the start of the first-quarter earnings season, which informally kicks off when Alcoa (AA) reports its results on April 11.

And so far, it's shaping up to be a doozy -- at a time when stocks and the economy are looking vulnerable.

The Dow Jones industrials index appears to be on the verge of breaking the post-Feb. 11 uptrend as it desperately clings to the support offered by its 20-day moving average. Last Thursday and again on Friday, it looked like the benchmark could close under this level -- the first since Feb. 12 -- before intraday rallies saved the situation.

Measures of market breadth continue to narrow as well, with the percentage of NYSE stocks above their 50-day moving average falling below 80 percent last Thursday for the first time since early March. Fewer and fewer stocks are looking attractive to buyers at these levels. Stock valuations are also lofty, with the 12-month forward price-to-earnings ratio on the S&P 500 at 16.7 vs. a five-year average of 14.4 and a 10-year average of 14.2.

On the economic front, the Atlanta Fed downgraded its GDPNow first-quarter growth forecast to just 0.1 percent after a weak wholesale trade report Friday morning.

Turning to earnings, analysts are bracing for what's set to be the worst reporting season since 2009 -- and what could mark the fourth consecutive quarter of falling profitability. The expectation is for S&P 500 earnings to decline 9.1 percent from last year's first quarter.

That's down from the 0.7 percent growth expected back in December, before the quarter started. The optimism has since faded largely because of declines in energy sector earnings estimates.

A possible silver lining is that actual earnings have tended to beat dour expectations as management teams like to deliver positive surprises to investors, even if the news is bad overall. According to FactSet data, over the last four years, actual S&P 500 earnings have exceeded estimated earnings by an average of 4 percent. During this time, 67 percent of the companies in the index reported actual earnings per share above the consensus estimate.

Based on this dynamic, FactSet analysts believe the actual earnings decline will be closer to 5.8 percent. That's better, but clearly not great because it would represent the worst quarterly result since the third quarter of 2009, when earnings fell 15.7 percent in the midst of financial crisis.

Looking ahead, analysts at Bank of America Merrill Lynch believe earnings growth should recover as the U.S. dollar weakens (which would boost foreign earnings of U.S. corporations), oil prices rebound and the economic data improves.

Let's hope they're right.

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