The first quarter earnings reporting period has entered its final stages, and it was simply brutal, both for the companies themselves and for investors. Wall Street will be glad to close the books on the quarter and move on—especially if Deutsche Bank is right about what we can expect in the second quarter. The firm expects a return to growth and argues against the consensus for another decline.

U.S. dollar’s drag to ease

Chief Strategist Binky Chadha and team said in a May 11 report titled “Some Top Down Arithmetic on Earnings” that several factors that have been weighing on earnings results over the last year are finally starting to abate. The first quarter was the fourth consecutive quarter in which earnings for the S&P 500 declined, and it marked the largest decline since 2008 to 2009 at 6.3%, the DB team noted.

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Indeed, it’s been a rough year for U.S.-based multinationals as the U.S. dollar weighed heavily on their earnings across the board. Other major factors that should combine to make the second quarter much brighter than the first in terms of earnings include oil prices, market volatility, and PMIs.

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U.S. dollar to boost Q2 earnings 1.9%

Chadha and team estimate that as the dollar’s strength eases, there should be a boost to earnings for the S&P 500 by 1.9% for the second quarter. Excluding Financials, Energy and Material, they said earnings growth can easily be explained by U.S. growth through PMIs, global growth through relative PMIs, and the U.S. dollar’s changes.

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They estimate that every 1% decline in the dollar increases earnings growth by 700 basis points for the S&P 500 excluding Financials, Energy and Materials.

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They note that we’re now starting to see past dollar appreciations “anniversary out,” and because of the recent decline in the currency verses other global currencies, the drag from the dollar should fall from -4% to -2.1%, providing a 1.0% boost to overall earnings for the index.

Oil prices to boost earnings 1.7%

Energy has accounted for the majority of the earnings decline for the S&P 500, and of course the sector’s earnings are tied to oil prices.

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However, the Deutsche Bank team notes that the recent declines have been bigger, so using consensus estimates, they found that the drag from Energy will ease as the drag from oil prices diminishes.

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They estimate that the boost from improving oil prices will be around 1.7% to total earnings growth and point out that Energy’s share in total earnings has diminished to less than 5%.

Domestic growth should be the biggest boost

Chadha and team peg the boost from a pickup in domestic growth at 3.2%, making it the biggest contributor to the expected boost for second quarter earnings. They note that the composite U.S. PMI for April was up 1.8 points from the first quarter average and estimate that every one point implies a 2% increase in earnings growth, excluding Energy, Financials and Materials.

However, they expect international growth to be a very slight drag of -0.2% on second quarter earnings as they note that the PMI for the rest of the world compared to that of the U.S. didn’t change much last month.

Market volatility to boost Financials

Market volatility has also finally started to come down, and the Deutsche Bank team believes this should boost Financials earnings, which in turn should boost overall earnings for the S&P 500 by 1.4%.  They explain that the VIX accounts for 62% of the variations in earnings in the Financials sector over the last few years with every one-point decline boosting the sector’s earnings by 37 basis points.

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The VIX has fallen 6.1 points from where it averaged during the first quarter, which the DB team said implies a 1.4% to overall second quarter earnings growth. They note also that the sector accounts for about 20% of the index’s total earnings, making it a key part of the picture.

Q2 earnings should turn positive, says DB

Together, these five earnings drivers suggest an 8.2% boost to earnings for the S&P 500, which would mean earnings growth of 1.9% for the second quarter, compared to the first quarter’s 6.3% decline. DB’s expectation for growth in the second quarter stands in stark contrast to the bottom-up consensus, which expects a 4.7% decline in the index’s earnings for the second quarter.

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“The differential between our top-down arithmetic and the bottom-up consensus suggests downgrades should stop and indeed they have paused recently and eventually lead to upgrades or positive surprises,” write Chadha and team.

All graphs in this article are courtesy Deutsche Bank.