Leading up to earnings season, it appears many analysts have made negative revisions on the companies set to report their second-quarter results. But the pessimistic outlook on individual stocks could actually be a good sign for the market as a whole. And as earnings season gets started, corporate reports have largely looked good.
Over the last month, analysts lowered forecasts for 278 more companies than they raised forecasts for in the broad S&P 1500, according to Bespoke Investment Group. And since that presumably makes earnings expectations easier to beat, "it tends to be a good thing," Paul Hickey of Bespoke said Wednesday on CNBC's "Trading Nation."
So far, "the results are definitely coming in better than expected, which was helped by analysts setting the bar low."
The difference in expectations can lead to a big difference in market reaction, according to Bespoke data.
"When negative revisions have outnumbered positive revisions, the S&P has been up on average about 2.5 percent during earnings season," Hickey said. "Conversely, when you've had more positive revisions than negative revisions … the S&P has been down an average of 1.2 percent."
Since the start of the bull market, "there have only been three quarters where the earnings revisions spread was more negative than it is now heading into earnings season," Hickey wrote in a note to clients. "In each of those three earnings seasons, the S&P 500 was up between 4.7 percent and 5.2 percent during the reporting period."
Over the past week, as the first earnings have trickled out, the S&P 500 has gained more than 2 percent.
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