After bracing for the worst, Wall Street got a welcome surprise this earnings season.
Instead of the beginnings of an earnings recession, corporate profits are now expected to come in flat to slightly higher for the first three months of the year.
Lindsey Bell, investment strategist at CFRA Research, explains how the Street got it so wrong.
"Going into this reporting period, earnings estimates were cut from 5% positive growth on January 1 to negative 3% going into the earnings period. That's the sharpest cut that we've seen since the first quarter of 2009, which obviously was a very different economic environment than what we're in now," Bell said Thursday on CNBC's "Trading Nation."
More than a third of S&P 500 companies have reported earnings so far. Of those, 78% have beaten earnings estimates, while 56% have surpassed sales expectations.
Three sectors have led the earnings surge, Bell said: "We've seen technology companies as well as consumer staples companies and communication services companies, their numbers have been coming in the best so far. You're seeing the biggest moves there."
Outperformance in the staples stocks is especially positive for the rest of the market, she added. Eighty-six percent of the companies that have reported so far had better-than-expected results for the bottom line. The top line is also doing very well, she noted.
Staples "companies are actually able to pass through price increases to the consumer, so that says a good thing about the consumer. They're still feeling very strong in the wake of commodity prices rising, transportation costs rising," she said.
Even with the first-quarter surprise, management teams and Wall Street analysts appear to be underestimating the second quarter, too, she said.
"The numbers keep coming down. You saw Q2 estimates cut sharply over the last three or four months, but as earnings season has started, the numbers have been cut in half again from about an increase of 0.3% to half of that now," she said. "What that says about the market right now is that there's still a lot of caution out there between management teams, between Wall Street analysts. No one is certain that we've cleared the bar just yet."
Bell expects second-quarter profits to come in far better than the 0.15% increase expected. She forecasts 3% to 4% blended earnings growth for S&P 500 from April to June.