Markets have enjoyed a remarkable V-shaped market recovery so far this year as investors decided that central banks really did still have their backs. Fears of a global recession have been laid to rest as a seemingly co-ordinated policy response has squeezed the dollar lower and the oil price higher. Spring is in the air.
That's the good news. Having recovered all the ground lost in the first six weeks of the year, however, investors are holding their breath again as they prepare to absorb the quarterly torrent of news from the front line that is earnings season. Aluminium maker Alcoa kicked things off as usual last week but things really get under way in the next few days as America's biggest companies line up to report on the last three months and guide investors on the quarter to come.
Not since the financial crisis have expectations been so low. Profit forecasts have tumbled during the first three months of 2016 and analysts now expect earnings to emerge around 8pc lower than a year ago. This could be the worst quarterly performance ever outside of a full-blown recession.
The next few weeks matter for investors. While policy and investor sentiment can keep a market rally on the boil in the short term, it is earnings which determine the longer run outlook. Valuations are not generally excessive around the world after what must go down as the most grudging bull market in history, but earnings will need to be rather better than downbeat expectations imply if share prices are to hold on to the recent rally.
The spotlight will be very firmly on two sectors. Current trading for energy stocks is dire, with most analysts expecting the sector's profits to be wiped out completely. That's obviously a big contributor to the aggregate fall in profits, although it is quite possible that the first quarter of 2016 will see a fall in earnings even before the oil and gas wipe-out is factored in.
The second sector focus is related. Banks will give an indication over the next month or so of just how exposed their loan books are to the energy sector and the extent to which they are having to put money aside to offset future losses. Expectations for bank earnings are notably depressed.
Ironically, it is the sheer scale of the expected fall in profits which opens up the possibility that depressed forecasts will be exceeded. If US bosses are good at anything it is managing investors' expectations. Even in the dark days of 2009, the majority of companies beat forecasts. For years now, companies and Wall Street analysts have engaged in an elaborate dance which sees brokers rein in their numbers ahead of results day, allowing companies to look good and enjoy a short-term fillip to their share price.
Two themes are likely to dominate earnings season - oil and the dollar. The recovery in the oil price since its 12-year low in January is counter-intuitively positive for investors. You might think that cheap oil would be good news for stocks but below $30 a barrel it just scared the horses, raising deflationary fears and threatening the systemically important banks. Unsurprisingly, a 50pc rise in the oil price in the past three months has helped to stabilise stock markets.
The second key focus is the strength and more recent weakness of the dollar. The US currency has lost 3pc of its value on a trade-weighted basis so far this year, which all other things being equal should make US companies more competitive and raise earnings for S&P 500 companies by about 1.5pc. Obviously that is not going to have an impact on the results announced in the next few weeks but it is likely to be reflected in companies' outlook guidance.
Add together gloomy expectations, a healthier oil price and less of a currency drag and we may well find that the worst earnings season since 2009 turns out to be a lot better than expected. The two-month rally in markets could have another leg upwards. The question then will be whether the improving picture is sustainable. A number of other headwinds continue to blow in the face of US companies. First, their profit margins are high, thanks largely to stagnant wage growth in recent years. A pick-up in inflation would not only hit companies' labour costs but increase pressure on the Fed to raise rates. That in turn would put upward pressure on the dollar and make borrowings harder to service.
Only rising sales will enable companies to handle that cocktail of negatives. Sadly, revenue forecasts are almost as gloomy as those for earnings. With two thirds of America's top companies due to set out their stalls in the next fortnight, investors must hold their breath for a while longer.