Alcoa (NYSE: AA) kicks off first-quarter earnings season on April 24. Analysts surveyed by FactSet Research expect S&P 500 companies to report 9.1% annual earnings growth. That’s down from the 12.5% growth expected when the first quarter began, but would still represent the strongest move in five years.

Sales growth, expected at 7.2% for the market index, is also expected to post the strongest year-over-year growth since 2011.

#-ad_banner-#On top of strong earnings growth, U.S. companies get a near-term boost from recent weakness in the dollar as they translate foreign earnings. Loosening regulations could also lift specific sectors.

Against this strength in fundamentals we find a market that has stalled near record highs and investors hesitant to buy in at lofty valuations. After jumping 3.9% in February, the S&P 500 has flatlined as investors wait for earnings confirmation to push higher.

The next few weeks could give us that confirmation — or it could bring the long overdue correction for which the bears have been waiting.

I’ve found three sectors and three leaders in each with the potential to surprise to the upside, providing investors with a reason to send shares higher for the rest of the year.

Three Value Sectors With Potential Catalysts
Three sectors stand for potential catalysts through first-quarter earnings and beyond. All three have underperformed the broader index over the last three months but could outperform on earnings and improved investor sentiment.

Energy has been one of the worst performing sectors, with the Energy Select Sector SPDR ETF (NYSE: XLE) dropping 5.5% since the beginning of the year compared to a gain of 3.9% on the broader S&P 500.

This contrasts with expectations for $7.7 billion in sector earnings versus a loss of $1.5 billion in the same quarter last year. While energy prices closed the quarter on a multi-week decline, the average price of WTI crude during the quarter settled at $52 per barrel, a huge premium compared to an average of just $33.69 during the same quarter last year.

U.S. energy exports have surged since the government lifted a 40-year ban in December 2015, with crude sales to overseas customers jumping 69% in January from the year earlier to 746,000 barrels a day. The increase in crude exports not only means sales growth for energy companies but could significantly reduce the trade deficit and boost first-quarter economic growth.

Oil prices jumped in the last week of March by the most this year when Kuwait and several other OPEC countries voiced their support for extending group production cuts set to expire in June. Names in the energy space have traded mostly flat on fears that the production cuts would not be extended but many domestic producers took advantage of higher prices for crude to lock-in prices for 2017 production. This should come out in first-quarter earnings reports and could significantly lift expectations for the rest of the year.

Telecom is the only sector to trade below its 10-year average price-to-forward earnings multiple with companies currently trading for 13.6 times earnings estimates, a 5.6% discount to the ten-year average. The iShares US Telecommunications ETF (NYSE: IYZ) plunged 7% last quarter but several factors point to upside for the rest of the year.

Telecom has historically been one of the most heavily regulated industries, meaning companies in the space could have the most to gain from deregulation in the Trump Administration. The new chair of the Federal Communications Commission (FCC), Ajit Pai, has already signaled loosening restrictions and regulation in the sector. This could mean a more positive M&A environment along with other key drivers like growth of Internet of Things (IoT) demand and the buildup to 5G service.

Financials also underperformed during the quarter, posting a gain of just 1% year-to-date. Outside of telecom, financials trade at the lowest premium to long-term average multiples. The sector is trading for 13.8 times expected earnings for the next four quarters, a premium of 13% over the 10-year average multiple and well below the 26% premium where the broader market trades.

Valuations in the sector contrast with the fact that the Financials are expected to post the highest year-over-year earnings growth among eleven sectors, with a jump of 14.8% in profits expected. Higher interest rates since late last year and expectations for Fed hikes mean stronger profits for lenders and consumer confidence bodes well for loan demand. Headlines around repeal of some key Dodd-Frank provisions offer the potential for significant upside surprise.

Watch These Best Of Breed Companies For An Earnings Day Pop
Beyond upside potential in each of the three sectors, domestic companies should get a boost from the dollar’s relative weakening during the first quarter. The greenback has come down from its high at the beginning of January and could help boost earnings of large companies that book overseas sales.

The Dollar Spot Index started the year at 102.8 against a basket of currencies before falling to a quarter-low of 99.6 and ending the quarter at 101.8 on the index. The USD surged 7.7% in the fourth quarter and many companies warned of continued earnings headwinds on foreign exchange worries. That could reverse during first-quarter earnings calls for a boost of optimism.

HollyFrontier (NYSE: HFC) is expected to report a loss of $0.10 per share when it reports first-quarter earnings on May 3. The company has suffered in the weak refinery environment on a narrow price spread between crude and gasoline and on the high cost of renewable identification numbers (RINs) due to the obligation for ethanol blend.

Stronger domestic crude production should widen the price spread and drive profitability for the first quarter and through the rest of the year. The new administration has signaled that it may review the renewable fuel blending obligation for refiners, a headline that would send shares surging. The potential for this has already reduced RIN prices from $1 late last year to $0.50 currently and will be a point of optimism during the first-quarter earnings call.

CenturyLink (NYSE: CTL) is expected to report earnings May 3 and could reverse a four-quarter trend of consecutive earnings declines. The company disappointed the market in the fourth quarter but investors missed a strengthening picture that could come out during the first-quarter earnings report. Customer loss in the consumer broadband segment narrowed to just 5,500 in the last quarter of the year versus a loss of 40,000 in the previous quarter and 66,000 in the quarter before that. A return to customer growth in the first quarter could significantly improve sentiment.

The company sold its struggling data center segment in fourth-quarter 2016 in a move that supports cash flow and profitability. CenturyLink paid a dividend yield over 8% last year and was still able to add to net cash after investing $3.0 billion for future growth.

Capital One Financial (NYSE: COF) is one of the first in the group to report when it releases first-quarter earnings on April 25. Capital One was another that disappointed investors during its fourth-quarter report but set the stage for an upside surprise this quarter.

The company increased its loan loss provision to 2.9% and its allowance for total loans to 2.65% from 2.23% in the same quarter the year before. On a strengthening labor market and wage growth, actual loan losses may come in less than expected and the company could report surprisingly strong earnings in the first quarter and through 2017.

Risks To Consider: Larger macro-events like investor sentiment on potential tax reform and any economic weakness could weigh on even the strongest first quarter stocks.

Action To Take: Position for a bounce in these three sectors and the potential for upside in three best-of-breed names on strong first-quarter results.

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