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How Wall Street is making lemonade out of earnings lemons

In what has been an otherwise dismal first-quarter earnings season, Wall Street is hanging onto one hope — that the worst may be over.

Corporate profits have been in their worst skid since the financial crisis, on pace for their fourth consecutive quarterly decline as a stronger dollar, an oil bear market and slumping economic growth both in the U.S. and globally eat into top and bottom lines.

Market pros believe, however, that the first three months of 2016 are showing signs of a trough.

They're mostly taking heart in corporate outlooks and the way analysts are making revisions either up or down for coming quarters. One metric in particular stands out: Just 47 percent of the 311 companies that have reported so far are seeing second-quarter estimates coming down, for an average of a 1.23 percent downward revision after reporting, according to Nick Raich, CEO of The Earnings Scout. That number compares to 71 percent seeing a 4.76 percent cut in next-quarter estimates at the same point in the fourth quarter.

"This is positive delta for EPS estimate revisions and justifies the rally in global stock prices," Raich said in his daily note. "It was also very predictable and the major reason we removed our bearish underweight to stocks in early March after being negative on equities for the prior 13 months."

Investors indeed don't seem terribly bothered by the overall horrid state of corporate profits.

S&P 500 earnings are on track to decline 7.6 percent from the same period a year ago, according to FactSet. Just three out of the index's 10 sectors are projected to show positive growth.

Thanks to a dramatically lowered bar, about 74 percent have beaten Wall Street bottom-line expectations this season, while 55 percent have topped sales estimates. Companies issuing negative guidance have doubled the total issuing positive guidance, with the 67 percent negative guidance level actually below the historical average of 73 percent.

Second-quarter earnings also are expected to be negative, with the current estimate for a 4.4 percent drop.

However, current predictions are for the direction to shift in the second half. Projections for the final two quarters currently are for respective gains of 1.6 percent and 7.5 percent, according to FactSet. The revenue picture is for a 1 percent decline in the second quarter followed by gains of 1.8 percent and 4.3 percent.

On a sector basis, materials and staples actually have seen more positive than negative revisions, while analysts remain most pessimistic about the future of energy, according to Bank of America Merrill Lynch. For previous quarters, Wall Street had been hanging onto the theme that the earnings slump was just about the collapse in oil prices, but that argument no longer holds. Even excluding energy from the aggregate picture, S&P 500 earnings declined 2.4 percent in the first quarter.

Overall, BofAML's three-month tracker for earnings revisions increased to 0.76 from 0.53, with a reading of 1 indicating growth. The one-month tracker, a more volatile measure, increased to 1.03 from 0.77, which is the first time above 1, or growth, since August.