Wall Street Expects a Strong Earnings Season. Will That Be Good for Stocks?

• The S&P 500's forward price-to-earnings ratio has contracted from 22 to about 19, indicating a 'meaningful derating' according to Goldman Sachs, with some investors now calling U.S. stocks 'on sale'
• Goldman Sachs warns this will be 'a challenging trading environment for stock pickers' as elevated energy prices and supply chain disruption are likely to weigh on corporate profits, with macro volatility reducing the typical impact of reported results on stock prices
• Recent examples like Nike and airline stocks show companies are being judged on their outlooks rather than results, with investors particularly focused on executives' commentary about potential war impacts and tariff effects

Summary: Wall Street Expects Strong Earnings Season Amid Market Uncertainty

Key Timeline & Coverage:

First-quarter earnings season begins the week of April 13, with companies representing approximately 70% of the S&P 500's market capitalization reporting by month-end.

Market Context:

The S&P 500 has declined roughly 9% from January highs, while the forward price-to-earnings ratio has contracted from 22 to approximately 19, indicating reduced investor confidence. Despite rising earnings-per-share expectations, analysts anticipate a challenging trading environment.

Main Concerns:

Goldman Sachs Research identifies two critical uncertainties:

1. Impact of elevated energy prices and supply chain disruptions on corporate profits
2. Federal Reserve policy response, which investors may be "mispricing"

Historical energy shocks show varied outcomes—earnings contracted 15% after Iraq's 1990 Kuwait invasion but rose 18% following the 2003 Second Gulf War. Consumer discretionary sectors typically suffer most, while energy sectors benefit.

Forward-Looking Focus:

Investors are prioritizing company outlooks and executive commentary over backward-looking results. Recent examples include Nike, which beat earnings expectations but faced stock declines due to disappointing forward guidance, and airline stocks falling on cautious outlooks.

Market Implications:

While analysts are increasingly optimistic and raising earnings estimates more than usual, Goldman Sachs warns that "macro volatility" means reported results will have "smaller than usual impact" on stock prices. The firm suggests the market may be mispricing Fed policy expectations.

Despite headwinds, some analysts view elevated corporate profits as evidence of economic resilience, explaining why stock declines haven't been more severe given multiple market shocks.