Coming Week: 'Glimmer of Hope'

It hasn't been pretty, but underneath the headlines early in the first-quarter earnings season, there are some reasons for investors to be hopeful.

More companies than usual are missing expectations on Wall Street, but the carnage is nothing like that of the fourth quarter of 2007 when analysts over-estimated profits for the S&P 500 by 33.5 percentage points -- their biggest miss ever.

Furthermore, stocks are holding their ground and even rising in some instances in the face of ugly performances, suggesting that investors have made great strides in coming to terms with their predicament.

"There may be a glimmer of hope in these otherwise dreary numbers," says Thomson Financial analyst John Butters. "It seems like maybe the analysts are starting to get the numbers down to where they should be."

On Friday, Thomson Financial reported that one week into the heart of the first-quarter reporting season, expectations for profits from the S&P overall had drifted down by one-half a percentage point to 14.6%.

Out of 99 companies that had reported results so far, 63% had beat estimates, falling below the average 66%. Meanwhile, 24% of the companies on the books have missed expectations -- above the average 21%. Some major misses have been especially worrisome, like General Electric GE and Pfizer PFE.

Despite the disappointments, stocks gained last week. The Dow Jones Industrial Average and the S&P both rose by 4.3% for the week, while the Nasdaq Composite was up 4.9%.

When Merrill Lynch MER reported a loss for the quarter of about $2 billion, with $6.6 billion in write-downs on bad debt, its stock rallied in the following session by about 4% even though the results fell below expectations on Wall Street.

Citigroup C followed up on Friday with a loss of $5.1 billion on $12 billion in writedowns and a $3.1 billion increase in credit costs in its global consumer business. Nevertheless, its stock rose 4.5% during the session.

Wall Streeters have been calling a bottom in financials for months now, and the current efforts to rally investors may prove as fruitless as its predecessors. That said, the trading action surrounding first-quarter results seem to display a renewed confidence that has been lacking since the credit crisis began last summer.

Like previous quarters, financials remains on track to be the worst performing sector in the first quarter. It's expected to show a 67% decline in year-over-year earnings for the period when all is said and done.

But in a glimpse of how expectations have shifted, 53% of the financial institutions that have reported first-quarter earnings so far have beat Wall Street's expectations, while 31% have missed. For the fourth quarter, those numbers were basically reversed, with 34% beating expectations and 59% missing.

Factoring out the financials, the S&P is headed for a 6.7% increase in first-quarter earnings. On the flip side, the overall numbers are getting a big boost from the energy sector, which remains awash in profits amid soaring fuel prices -- hardly a boon to the broader economy as consumers struggle with record-high prices at the gas pump.

Factoring out the 28% profit growth expected for the energy sector, along with the massive losses for financials, the S&P is headed for a measly 1.9% gain.

To be sure, these numbers could gyrate wildly as the reporting season brings more surprises. Last week, Google GOOG blew away Wall Street's estimates and quashed fears of a slowdown in online ad spending as the U.S. recession takes root. In the industrial sector, Caterpillar CAT also surprised big to the upside. Shares of Google ended the week up 18%, while Cat shares added 14%.