Don’t belittle Corporate America’s famous profit engine.

Equity strategists are boosting earnings forecasts for the S&P 500 Index over the coming year faster than they are marking them down, pushing a key indicator tracking the momentum of analyst revisions well off its November nadir. After hitting negative 70% late last year, this metric — which focuses on forward earnings-per-share over 12 months — is closer to positive territory at minus 28%, according to data compiled by Bloomberg Intelligence.

The indicator has been touted as a forward-looking gauge on the profit outlook that may support the case for stock gains over the coming year. The trough in revisions is a tell-tale sign that the earnings story is picking up, per Michael Casper, equity strategist at BI. In fact, the S&P 500 historically has seen a median increase of 5.1% in the four quarters following a trough in earnings-per-share growth, BI data show.

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“This is good news for the outlook on corporate profits and the trajectory of the stock market because this indicator has most likely finally bottomed,” Casper said. “It means more stocks are beginning to see better times ahead — and an eventual positive reading will confirm that the outlook is indeed rosier for 2024.”

So even though profits for S&P 500 firms are forecast to drop for a third straight quarter, earnings growth is actually improving when the energy sector is excluded. The group has skewed estimates lower for the broader index as inflation and commodity prices ebb, with earnings growth without the sector expected to return in the second half of the year, BI data show.

It’s the latest seemingly improbable twist for the great risk rally of 2023 that’s defying Wall Street worrywarts fretting everything from a recession to aggressive Federal Reserve hikes.

While nine of the 11 sectors in the benchmark gauge see negative revisions for profits over the next year, two key groups known for their cyclical monicker — industrials and discretionary — have turned positive, while technology is on the precipice of also reaching that encouraging threshold.

That’s a pivotal development since industrials and discretionary, which are tied to the health of the US economy, were among the first sectors to lead a slowdown in earnings growth last year. This time around, they are driving the recovery in profit outlooks since many of the firms housed in the two industries are economic reopening plays following the pandemic. Of course, energy faces the most pain as inflation has ebbed, with crude prices subsequently falling.

With that said, there remains plenty of concern that the stock market could be dragged down further by an economic slowdown or recession that would cut more deeply into profits, particularly on lingering concerns that a still-hawkish Fed will derail the rally. That’s set off alarm bells for some following this year’s massive rally in Big Tech, leaving stock multiples rich and market concentration sitting at extremes.

“The big risk is valuations remain too high,” cautioned Brian Frank, portfolio manager of the Frank Value Fund. “If there’s a significant decline in overall earnings growth for the S&P 500, there would be a lot of possible downside for the broader stock market.”

Wall Street analysts project that S&P 500 companies will see the biggest contraction in earnings growth during the second quarter, where profits are expected to fall by 9% year-over-year. With just over 5% of companies in the index having reported, profit growth for the period is on track to have contracted by 9.3% thus far.

Still, to Dan Eye, chief investment officer at Fort Pitt Capital Group, the momentum from upward revisions to earnings estimates may start to surpass the Fed’s interest-rate policy as the primary driver of the stock market in the coming months.

Why? Well, other positive signals suggest that broad profit growth will return in the second half of the year, particularly as producer-price inflation continues to improve — a decisive moment that’s promising to bolster margins, which is poised to help usher in a better-than-feared profit outlook for the second quarter.

“The worst of the profit pain is likely over, unless there’s a situation where there’s a deep recession — which we don’t see since inflation has significantly eased,” Eye added. “It’s pretty obvious that the stock market started sniffing out brighter times ahead for earnings awhile ago, as clearly reflected in this year’s equity rebound.”