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Alcoa’s less-than-A-grade results have kicked off the US earnings season. So what do other first-quarter numbers have in store? Certainly things are going to be uglier than analysts predicted just three months ago. Back then, reported profits for S&P 500 companies were expected to fall 13 per cent year-on-year. Now the consensus is for a drop of nearly 40 per cent, with contractions across the board including defensive sectors, such as staples and utilities.

All gloomy stuff. Some strategists, however, are cautiously optimistic. After all, earnings have already plummeted 82 per cent since their peak in June 2007, worse even than the collapse during the Great Depression. Versus last quarter, earnings will actually be up this time, thanks to less-than-nuclear financial losses. JPMorgan calculates that since 1949 share prices have bottomed, on average, about six months ahead of trough earnings. So even if late summer marks the nadir, March’s low for equities could arguably have been the turning point.

But investors should pause before dancing off into the spring sunshine. Equity strategists – whose very existence requires bullish DNA – are often more muddle-headed the worse earnings become. For example, in March 2001, the consensus view was for net profits to fall 2.3 per cent for the full year, according to JPMorgan. By November, with just one month left for analysts to ponder, that had only been revised down to a fall of
14 per cent. In the end, reported earnings for 2001 halved. Oops! A similar pattern occurred in the early 1990s downturn.

Unfortunately comparing the current situation with earnings and stock prices in the past is risky – forecasts are nearly always destroyed by bolts out of the blue. Back in 2007, few of today’s bulls predicted that equities were going to halve, nor the reason why. Today banks and households have barely begun deleveraging and governments everywhere are soon going to have to restore some semblance of order to ravaged public finances. Against this backdrop, any recovery in earnings will be slow and fitful.

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