As Corporate America gears up to report first quarter earnings this week, Deutsche Bank fired off a report to clients that predicts modest results and a modest reaction from the stock market.
The investment bank is looking for 6.9 percent year-over-year revenue growth, the sixth straight quarterly revenue increase. It will be led by revenues in energy, materials and info tech.
It believes that financials and utilities are the only two sectors that are poised to report sales declines for the three-month period.
Revenue growth will be heavily influenced by sales in international markets, especially emerging markets, Japanese supply chain disruptions, and the impact of the weakening dollar. Deutsche Bank points out that the dollar has declined 5 percent year-to-date.
As a result, the bank is calling for the sixth consecutive quarter of double-digit earnings growth. However, it expects the first quarter will be the slowest growth rate of the six quarters, rising 12 percent year-over-year.
It says earnings growth will be led by the traditional cyclical sectors--materials, energy and industrials. On the other hand, healthcare and utilities are expected to show negative growth.
Keep in mind that the energy sector comprised 14 percent of the earnings. So, overall earnings excluding energy are expected to rise just 9 percent year-over-year.
Deutsche Bank says in the report that one area of focus will be the trend in margins, noting that several sectors such as consumer discretionary and consumer staples have had difficulties passing on price increases. "Margins for most non-commodity related sectors will be challenged by higher commodity prices, increased employment costs (as the economy creates jobs), and increased capital expenditures," the report notes.
How will the stock market react if DB is correct? "Strong earnings will continue to place a positive fundamental backdrop for equities, re-enforcing the attractiveness of valuations," it told clients in the report.
However, it warned that with the S&P 500 up nearly 6 percent year-to-date, he bar has been raised. So, it expects "a more muted positive price response."
Indeed, it stressed that as the earnings recovery has progressed, particularly over the last four quarters, the number of companies "beating" estimates and the magnitude of "beats" has diminished. "The expectation of the continuation of this trend and more reserved guidance will lead to a more volatile environment in the near term."