February and March wrought technical damage on major US equity indices, but the path of least resistance increasingly looks up near-term.

March-quarter earnings season is upon us. This is the first quarter US companies will be reporting after the Tax Cuts and Jobs Act of 2017 was signed into law on December 22 last year. Among other things, the federal corporate income tax rate was reduced from 35 percent to 21 percent.

The sell-side was quick to revise earnings estimates higher.Between December 21 last year and March 29, this year’s operating earnings estimates for S&P 500 companies went from $145.31 to $156.13, for S&P 400 from $97.60 to $105.96, and for S&P 600 from $45.41 to $50.51 (Chart 1).

In the most recent week, estimates for S&P 400 were at a new high, while for S&P 500 they peaked two weeks ago at $156.45 and for S&P 600 one week ago at $50.66.

At least for S&P 500 companies, the 2018 revision trend seems to be plateauing. This is also evident in 1Q18 estimates, which ended the quarter at $35.64 after peaking at $35.81 three weeks ago. They have more or less gone sideways in the past couple of months.

If past is prologue, by the time the 1Q18 reporting season winds down, earnings would have come in less than what the sell-side was expecting at the end of the quarter, which, to reiterate, was $35.64. This has been a persistent theme going back several quarters.In 4Q17, for instance, the consensus was $34.30 at the end of December, versus actual earnings of $33.86 when it was all said and done (Chart 2).

Should the trend continue, this can potentially act as a tailwind for stocks in the form of a lower bar.At least the bulls hope so.

Major US equity indices have suffered technical damage. Tech was a leader going into the selloff that began in late January, and was also the most to lose in March, with the Nasdaq 100 index down four percent versus a loss of 2.7 percent for the S&P 500 large cap index and 3.7 percent for the Dow Industrials.The Russell 2000 small cap index, in fact, logged a 1.1-percent gain in the month.

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