Analyst: Q2 earnings may be better-than-expected, thanks to weak dollar

Investors should brace for a better-than-expected earnings period, based on a number of important factors, says Liz Ann Sonders, Charles Schwab’s chief investment strategist.

“Oil has gotten a pretty significant lift-off of the bottom, the dollar has retreated a little bit, obviously the weather has improved, so a lot of the factors that contributed to a weak first quarter have reversed themselves,” she said Wednesday at a meeting in London.

Another reason for poor results in the first quarter was the West Coast port strike, she said, but is now a non-issue.

The first-quarter earning period was not as bad as it had been thought of, as it produced a meager 0.1% growth in profit for S&P 500 companies.

What caused a poor rate was mainly a rally in the dollar, which during the quarter traded at its highest level since 2003.

The firm currency had a harmful impact on companies with a large portion of their business overseas, with most of them referencing the dollar as a significant constraint for earnings and sales in the first three months of 2015.

At the same time, for the second quarter so far, the ICE dollar index DXY has lost 4.9%, easing pressure on companies with sales outside the U.S.

“A bit of a reprieve in terms of the ascent of the dollar will probably serve second-quarter earnings well because it was a strong contributing factor to what - although it was not as weak a quarter as was anticipated - not a great [first] earnings quarter,” Sonders said.

The firm dollar has also made many export-driven companies reduce their earnings outlooks for the rest of this year which is reflected in the analyst expectations for the second quarter, as FactSet estimated a 4.3% drop in earnings year-over-year and a 4.8% slide in revenue for S&P 500 companies. The current numbers represent a significant shift from the estimates on Dec. 31, which called for a 4.9% rise in earnings and a 1% climb in revenue.

Sonders, however, is not that negative on the outlook analysts currently forecast.

“They probably set it too low for the second quarter, but I think they may have also set it too high for the third and fourth quarters. So I think we’ll see numbers improve relative to estimates in the second quarter,” she said.

July 8 is an unofficial start of the second-quarter earnings - when aluminum giant Alcoa AA reports results.