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Trader Talk: The 'other' reason for the market strength — improved earnings

The first quarter ends on Friday.As Washington moves on from health care to tax reform, traders are taking note of the improved earnings outlook.

First-quarter earnings are now expected to rise 10.4 percent from the same period last year, according to Thomson Reuters. That's the best quarterly showing since the third quarter of 2011 — nearly six years ago.

"There is no doubt, growth is accelerating in the first quarter," said Nick Raich, who tracks earnings estimates as The Earnings Scout.

After weeks of watching the ugly debate over health care, traders are eager to change the subject for a simple reason: A strong earnings season may help stabilize the market during what is likely to be a rocky debate over tax reform and the inability to pass health-care reform.

"I think a strong earnings season could be very supportive for the markets because instead of making excuses about why the market is so high on just the Trumpagenda, we could have an obvious reason to point to," Brean macro strategist Peter Tchir told me.

Early signs indicate the earnings numbers may be even better than expected. The first 12 companies that have reported Q1 numbers — companies with quarters ending in February, including Micron, Nike, Oracle and Lennar, have reported average earnings gains of roughly 12 percent. Even better: Those 12 have seen average revenue increases of 8.5 percent, the best quarterly gains since the second quarter of 2014.

Key to the rising numbers:

1) The two biggest sectors, technology and financials, are set to deliver earnings gains of roughly 15 percent apiece, and

2) Energy earnings, after nearly two years of declines, have turned positive.

What's the risk? Energy, which saw earnings decline for nearly two years, is expecting to see a big rebound in Q1 and into the rest of the year. Chevron, for example, reported a 22 cent loss in the first quarter of last year and is expected to report a gain of 90 cents this time.

Can big oil pull off big gains in 2017? It seems problematic with oil in the mid-$40s since many of the earnings estimates for big oil were developed with oil closer to $60. However, John Butters at FactSet notes that the average price for oil this quarter is $52.07, which may be enough to pull off expectations for at least this quarter.

Traders on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Traders on the floor of the New York Stock Exchange.

Regardless, analysts remain bullish that oil can pull off sizable gains this year: 10 of 14 analysts traced by FactSet have buy recommendations on Chevron, for example.

Bottom line: With an ugly fight over Obamacarelikely over for the moment and markets about to enter a seasonally weak couple weeks just prior to the April 18 tax deadlines, the good news on earnings is coming at an opportune time.