By Caroline Valetkevitch
NEW YORK (Reuters) - The upcoming earnings season may not be the time for investors to buy aggressively, because this year's winners already reflect earnings optimism.
The first-quarter reporting period, which begins Monday with results from aluminum company Alcoa Inc <AA.N>, follows three months of solid gains that have brought stocks close to two-and-half-year highs.
Some gains have been in anticipation of a strong earnings season, particularly for the energy and other cyclical sectors, analysts said, raising questions about whether this quarter's reports will be enough to keep the recent uptrend intact.
Stocks have been going up "in anticipation of earnings that are going to be what the real consensus is basically expecting," said Ken Fisher, chairman and CEO of Woodside, California-based Fisher Investments, which manages $43 billion.
Some investors see the rise in energy and other stocks that benefit when the economy starts to recover as unsustainable and have been paring back positions.
"We believe commodity inflation is probably near a peak as is the interest level in many deeper cyclicals" including the energy sector, said Tom Galvin, managing director and lead portfolio manager at Columbia Management in Stamford, Connecticut, which has about $6.5 billion in assets under management.
Overall, first-quarter earnings for S&P 500 companies are expected to have increased 11.4 percent from a year earlier, but that's down slightly from a forecast of 13 percent on April 1, based on Thomson Reuters data.
Strategists fear higher commodity costs could dampen results for consumer-related companies as well as those in industries with heavy fuel costs such as transportation.
Profit margins are expected to drop to 8.13 percent in the first quarter from 8.41 percent in the fourth quarter, according to Charles Blood, senior market strategist at Brown Brothers Harriman.
The energy sector far surpassed other sectors in the first quarter. The Standard & Poor's energy sector index <.GSPE> was up 16.3 percent in the quarter, compared with the overall S&P's gain of 5.4 percent, and oil prices are at 2 1/2-year highs.
During the fourth-quarter reporting period, the S&P 500 <.SPX> gained about 3.6 percent.
Since January 1, the energy sector has been revised up the most, with its expected growth rate for the quarter rising to 25.9 percent from 11.5 percent, according to Thomson Reuters data.
On the other end of the spectrum, the telecommunications sector has been revised down the most, falling to -3.4 percent from 7.5 percent.
Fisher, who sees the market mostly flat this year, said expectations won't be exceeded in the upcoming earnings period as they were in recent quarters.
"Some will shoot the lights out - the obvious $64,000 question is which ones," he said.
"If you like materials, you'd better be careful which ones. The easy days of just buying materials and riding it free, that's two years old now."
Others agree that much of the earnings optimism is already in the market. That may set up a dynamic similar to the fourth quarter reporting period, when only companies that far surpassed expectations rose substantially after reporting results.
"People are very, very cautious about underweighting (the energy sector) because if you were underweight that sector in the past couple of quarters, you underperformed," said Natalie Trunow, senior vice president and chief investment officer of equities at Calvert Asset Management Company in Bethesda, Maryland. It manages about $14.8 billion in assets.
"There is so much optimism around energy, I'm just not sure that it's not already priced in, and likewise for materials," she said. The S&P materials sector <.GSPM> was up 4 percent in the first quarter.
Some, however, are sticking with the trends that have worked. Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont, said he recently added to his gold position. Gold prices have been trading at all-time highs.
(Reporting by Caroline Valetkevitch; Editing by Andrew Hay)