U.S. corporate earnings are shaping up to be better than expected in the first quarter, compared with the previous quarter as bank results stabilize. But profitability remains well below pre-recession levels.

Forecasts for the second and third quarters show a steady improvement in earnings before analysts see a return to positive growth, hand in hand with an economic recovery, in the last quarter of 2009.

With around a quarter of S&P 500 companies having reported so far, data shows an average annual decline of 36 percent in first-quarter earnings, compared with a 67 percent drop in fourth-quarter profits, according to the Thomson Reuters' Director's Report.

It has obviously been a very productive and good earnings season compared to the last five to six we've had so far mainly because the financials ... have basically outperformed expectations, said Ashwani Kaul, head of company and economic data research at Thomson Reuters.

I think we are definitely at an earnings bottom. I don't think there is any doubt about that.

Data from Standard & Poor's shows that 59 of the 108 companies that reported before the market's close on Wednesday beat estimates, compared with 45 that have missed.

We do have positive earnings, which is a vast improvement over last quarter, but still a long way from where we were a year ago, much less two years ago, said Howard Silverblatt, senior index analyst at Standard & Poor's.

We were kind of geared in the estimates and the guidance to assume things would be worse than they were so they came up a little bit better.

BANKS' PLEASANT SURPRISE

Improved earnings performance has been helped by a better-than-expected set of results from many banks, which posted a massive fall in earnings in the previous quarter.

Wells Fargo & Co set the tone in the financial sector when the company previewed its earnings a week early with a surprising record profit. Citigroup , JPMorgan Chase & Co , and Goldman Sachs have also beat consensus.

Kaul says improved earnings performance is mainly because the financials have outperformed expectations -- so far 58 percent of financial companies have beat estimates, which is a far cry from the last five or six quarters.

AIG MIGHT SPOIL THE PARTY

But with American International Group not reporting until May, average losses could take a hit. AIG posted the largest quarterly loss in U.S. corporate history of $61.7 billion in the fourth quarter.

That is one company that is probably going to put some pressure on the financials' earnings, Kaul said.

Earnings of healthcare companies, the only sector to report

growth in the previous quarter, are hovering around the break-even mark so far in the first quarter, hurt by a strengthening U.S. currency eroding export revenues. The U.S. dollar rose 5.4 percent in the first quarter against a basket of six currencies.

However, despite some glimmers of hope in earnings, investors are looking more to outlooks from management as they try to call the recession's bottom.

There is a sense that investors are looking well past earnings and are trying to sniff out any symptoms of improvement, and they're pricing those improvements aggressively in some cases, said Lawrence R. Creatura, a fund manager at Federated Clover Investment Advisors.

But he added: With respect to visibility, management teams aren't commenting much -- it's about as clear as a glass of milk out there.

(Editing by Jan Paschal)

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