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Corporate profits just posted their biggest jump in five years

  • Profits for S&P 500 companies are up nearly 15 percent, the best period since the third quarter of 2011.
  • The best sectors have been cyclicals, which speaks well for the economy's direction.

U.S. companies kicked off 2017 by posting their most profitable period in more than five years.

With annualized gains of 14.9 percent in the first quarter, the S&P 500 collectively shook off the dust of a pernicious earnings recession and pointed toward a year ahead likely to continue to show growth.

"First-quarter earnings season has been very strong by several measures, with early results driving the most recent leg up in the market and helping to support elevated levels of valuation," Lindsey Bell, investment strategist at CFRA, said in a report. "It's safe to say the market has successfully emerged from the earnings recession."

Indeed, corporate America not that long ago found itself mired in a slump that saw earnings decline for five straight quarters. That decline ended in the third quarter of 2016, but it took until the calendar flipped to 2017 for profits to really accelerate.

With close to 90 percent of S&P 500 firms reporting, about 72 percent have topped Wall Street estimates, according to S&P Capital IQ. That's even better than the usual 66 percent that post beats and the second-best quarter in terms of exceeding estimates in the past six years.

Moreover, it's the best three-month period in terms of overall earnings growth since the third quarter of 2011. At the start of earnings season, the Street was expecting profit growth of 9.7 percent.

Cyclical sectors led the way, with technology, financials and materials the best of the index's 11 major sectors. That's a positive sign for the economy.

The surge in profit growth came despite an otherwise rough period for the economy. Gross domestic product increased just 0.7 percent for the first quarter, according to the government's initial read, though that also is expected to accelerate. CNBC's Rapid Update is pointing towards a 3.4 percent growth rate for the second quarter.

To be sure, that earnings recession actually is helping the current numbers by making comparisons easier. The same quarter a year ago showed a decline of about 6.5 percent.

Still, 10 of the 11 sectors showed earnings gains over the year, and the outlook ahead is less pessimistic than usual.

So far the level of companies that have guided lower for the second quarter is at 58 percent, below the historical average of 66 percent. Companies often like to set a lower bar for earnings season to get traction from surprises.

CFRA's Bell said Q2 is now tracking at an 11.1 percent gain, up from the 10.4 percent projection a month ago. However, she feels that expectations for the second half of the year may be too optimistic.

"The market and analysts are seemingly pricing in lofty benefits from President Trump's potential policies on tax reform, infrastructure spending, repatriation and deregulation, preventing analysts from adjusting estimates further downward," Bell wrote.

Should Trump's agenda hit a snag, that could take down expectations.