Something doesn’t quite add up. U.S. oil prices have risen over 70 per cent in the last year, inflation remains above 3 per cent, geopolitical risk is off the charts. But Wall Street’s earnings outlook could not be rosier.
As the first quarter reporting season kicks into gear this week, the Nasdaq is higher than it was before the Iran war started on February 28, and the broader S&P 500 isn’t far behind. It’s almost as if the last six weeks didn’t happen.
But even if the shaky ceasefire in the Middle East turns into a permanent cessation in hostilities - a big “if” - the economic damage and price impact will still last for months, possibly years.
The magnitude of these shifts, their duration, and ultimate impact on the U.S. economy are all up for debate. But their existence isn’t.
Bank of America economists sum it up neatly: “Even if the ceasefire persists, we are unlikely to move back to the pre-war scenario.”
Yet that’s exactly where Wall Street seems to think we’re heading.
In some ways, the stock market’s nonchalance shouldn’t come as a surprise, as Wall Street has proven surprisingly bulletproof amid the ructions of U.S. President Donald Trump’s second term. The recovery from his “Liberation Day” tariff turmoil a year ago was stunning. It underscored how resilient Wall Street has become to shocks and how confident investors are in the money-spinning powers of artificial intelligence.
In that light, the LSEG consensus forecast for 13.9-per-cent year-on-year growth in first quarter earnings seems reasonable. That would be in line with the previous four quarters and may help justify the Nasdaq and S&P 500’s return to pre-war levels.
The outlook for the rest of this year, however, is more puzzling.
Consensus forecasts for earnings growth in the remaining three quarters are 20 per cent, 22 per cent, and 19.9 per cent, respectively. That would represent the strongest growth in U.S. corporate earnings since 2018, excluding the pandemic-distorted year of 2021, according to Tajinder Dhillon, head of earnings research at LSEG.
But if corporate America is to rack up profits at such a breakneck speed, it will have to overcome a growing number of obstacles.
The whiff of stagflation is in the air.
The Consumer Price Index report on Friday showed that gasoline prices in March spiked 21 per cent on the month, while other motor fuels, including diesel, soared more than 30 per cent. Both were record rises.
Meanwhile, consumers have never been more glum. The University of Michigan’s survey also released on Friday showed that consumer sentiment had slumped to its lowest on record.
It’s easy to see why. Growth this year will likely be weaker than it would have been absent the war.
Bank of America economists lowered their 2026 U.S. gross domestic product (GDP) growth forecast by 50 basis points to 2.3 per cent – a significant revision. They also raised their core personal consumption expenditures (PCE) inflation outlook by 70 bps to 3.1 per cent.
And that may be optimistic: with oil 70 per cent more expensive than it was a year ago, headline inflation may creep up toward 4 per cent, moving even farther from the Federal Reserve’s 2 per cent target.
This has altered the expected path of U.S. interest rates in the coming months. At the start of the year, futures markets implied 60 bps of easing by December. Those expectations have now evaporated, and the Fed’s next move appears as likely to be a hike as a cut – something unthinkable only six weeks ago.
Of course, none of this is set in stone. The economy is much less oil-intensive than it used to be, consumer sentiment increasingly bears little relation to actual spending patterns, and companies could prove resilient if these shocks are short-lived.
Still, it would be remarkable if none of this dented profits.
For starters, much of this earnings boom is expected to be powered by the tech industry. The all-powerful sector’s earnings are expected to rise 46 per cent in the first quarter, meaning tech would account for nearly 80 per cent of the expected US$74-billion total profit growth.
But “Big Tech”, with its US$800-billion capital expenditure plans on energy-intensive data centers and other artificial intelligence infrastructure this year – much of it debt-financed – is now particularly sensitive to both soaring energy prices and the cost of money.
Equity investors are optimistic by nature, but the positivity permeating Wall Street is striking. The question now is whether corporate guidance in the coming weeks deflates those high hopes.