NEW YORK (TheStreet) -- Remember the "earnings recession" in the first quarter that was supposed to be such bad news? The final numbers say it never happened. Knowing why it didn't happen helps teach us what to expect when the second quarter ends next week and profit reports begin anew.
Profits actually rose 3.2% in the first quarter, defying expectations for a 3% drop -- analysts are usually a little bit too pessimistic but not by this much, said S&P Capital IQ strategist Sam Stovall, in an interview. The reasons: Multinational corporations did a better job managing their exposure to a strengthening dollar than many expected, while plunging energy prices cut energy-company profits by 59%, but hurt everything else less than analysts thought they would. Aside from materials, every other sector boosted profits, led by a 20% gain in technology and 11% for financial companies like JPMorgan Chase (JPM).
Analysts still expect second-quarter profits to fall about 4% from last year. At Bank of America Merrill Lynch, strategist Savita Subramanian says full-year profits will drop about 1%, while Stovall is at +0.4% for the year. Of the 13 times annual profits have fallen since World War II, 10 of them have accompanied or preceded a recession, Stovall says. But Subramanian says the short-term declines, curiously, are entirely useless for predicting the path of stocks in the affected years.
So what's an investor to do?
To look at the macro data, you'd bet on the market.
One reason second-quarter profit forecasts are so poor is that they rely on company guidance from early in the quarter, when the macroeconomic data were still weak enough to suggest a second-straight poor quarter. Nearly all of the estimate reductions for the S&P 500 happened two months ago or more, Subramanian said. But the macro data have improved markedly without sparking any reaction in estimates, even though a better economy should bring profits along for the ride.
May auto sales were the best since 2005, with obvious implications for General Motors (GM), Ford (F) and Toyota (TM).
Homebuilder earnings are beginning to come in: Lennar (LEN) is out Wednesday, in a traditional look at the low end of the market. Lennar isn't expected to beat forecasts, but Zacks Investment Research points to signs that PulteGroup (PHM) and Ryland Group (RYL) could surprise. KBHome (KBH) beat consensus by 2 cents a share Monday, though Barclays pointed out that most of that can be attributed to a tax issue.