Harry Peterson
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Here’s a sign investors are viewing earnings through rose-tinted glasses

While second-quarter earnings season is off to a great start, investors might be overlooking signs of potential trouble ahead, according to Bank of America Merrill Lynch analysts.

S&P 500 SPX, -0.11  companies are on track to report 7.2% earnings and 5% revenue growth for the second quarter. So far, more than 70% of firms that have reported beat earnings or sales expectations, according to FactSet.

But despite positive quarterly reports, an analysis of earnings calls suggests optimism may have peaked, the analysts said in a note, observing “a drop-off in mentions of ‘better’ relative to ‘worse’ or ‘weaker’ words.”

Moreover, the cut to third-quarter consensus earnings-per-share estimates is so far the largest since the fourth quarter of 2015, when profit growth was still declining and recession fears were percolating.