The US Q1 earnings season is set to commence, with markets navigating pressures from Middle East tensions, surging oil prices, and the AI investment wave. Despite this, major Wall Street institutions generally maintain an optimistic outlook for the upcoming profit reports.
Deutsche Bank forecasts that S&P 500 earnings per share (EPS) growth for the first quarter will reach 19%, marking the highest level in four years. This projection exceeds the market consensus of 16% and would represent the sixth consecutive quarter of double-digit growth. Similarly, Goldman Sachs anticipates that actual earnings will surpass consensus expectations, noting that historical patterns suggest the quarter's 3% real GDP growth is sufficient to support double-digit EPS expansion.
Notably, just two companies, NVIDIA and Micron Technology, are projected to contribute over 50% of the entire S&P 500's EPS growth for the quarter, underscoring the dominant influence of the AI investment theme on this earnings season.
However, geopolitical risks and macroeconomic uncertainties form a critical backdrop. The conflict involving Iran has driven a sharp increase in oil prices, while US March inflation data showed the largest rise in nearly four years, coupled with weakening consumer confidence. Concurrently, both the MSCI World Index and the S&P 500 have just experienced their worst quarterly performance since 2022. Institutions widely believe that forward-looking guidance and management commentary from companies this quarter will carry greater significance than the reported earnings figures themselves.
**Earnings Growth Set for Four-Year High, Consensus Already Elevated**
According to Deutsche Bank Chief Economist Binky Chadha, bottom-up analyst consensus estimates indicate that S&P 500 Q1 EPS growth will accelerate to 16.2% from 13.4% in the previous quarter. This would break out of the 8.5% to 14% range observed over the past two years, reaching the highest level in four years.
Chadha highlighted that it is historically rare for consensus estimates to be this robust before the earnings season begins. Over the past two decades, a similar scenario has occurred only three times: twice during deep recoveries following the global financial crisis and the COVID-19 pandemic, and once due to a mechanical boost from the 2018 corporate tax reforms. The current expectations are unique as they are formed without favorable base effects or policy tailwinds, following over two years of already strong profit growth.
Deutsche Bank's own forecast is more aggressive, projecting actual growth of 19%, slightly above consensus. However, they anticipate the magnitude of earnings beats to be relatively modest. Historical data shows that earnings ultimately surpass the initial consensus at the start of the season by an average of 3.3%, or 4.9% when measured against estimates on the reporting day. Companies that have already reported results show an average beat of 17.5%, though this is heavily driven by a significant beat from Micron Technology; excluding Micron, the beat rate is 5.5%.
**Macroeconomic Tailwinds and Weaker Dollar Provide Key Support**
Deutsche Bank attributes the strong earnings expectations to three main drivers: accelerating macroeconomic growth, benefits from a weaker US dollar, and the continued deepening of the AI cycle.
On the macro front, Deutsche Bank economists project US Q1 GDP growth at 2.9% year-on-year, at the higher end of the robust 2.5% to 3% range maintained over the past six quarters. The ISM Manufacturing PMI returned to expansion territory in Q1 after being in contraction for three and a half years, while the Services PMI climbed to a three-year high.
Regarding foreign exchange, the US dollar depreciated by an average of 6.8% year-on-year in Q1, its largest annual decline in about five years. Deutsche Bank estimates this contributed approximately 4.1 percentage points to S&P 500 EPS growth, with the Energy, Materials, Large-Cap Growth Tech, and Industrial sectors benefiting most significantly.
For oil prices, despite a sharp increase in March due to the Iran conflict, the average quarterly price was only about 2% higher year-on-year, providing only a modest boost to Energy sector profits so far. Deutsche Bank notes that if oil prices remain elevated, they could significantly boost Energy sector earnings in Q2 and beyond, potentially driving EPS growth for the sector above 100%.
**NVIDIA and Micron Technology: Two Companies Account for Half the Growth**
The AI theme is the central narrative of this earnings season.
According to Goldman Sachs data, the largest AI-related stocks are expected to drive over 60% of the S&P 500's Q1 EPS growth. Within this, NVIDIA (contributing 3.3 percentage points) and Micron Technology (contributing 2.7 percentage points) together account for over 50% of the total EPS growth.
At the sector level, Deutsche Bank expects EPS growth for the Large-Cap Growth Tech sector to accelerate to 35.7% from 27.5% last quarter, led by semiconductor manufacturers. Even excluding NVIDIA and Micron, growth for the sector is projected to be a strong 22%. Goldman Sachs points out that the Information Technology sector is expected to see EPS growth of 44%, single-handedly contributing 87% of the S&P 500's total Q1 EPS growth.
Analysts project that hyperscale cloud providers' total capital expenditure will reach $149 billion in Q1, a 92% year-on-year increase, although the growth rate is expected to moderate in subsequent quarters. Goldman Sachs estimates that AI infrastructure investment will contribute roughly 40% to the S&P 500's full-year 2024 EPS growth.
**Significant Divergence Across Sectors, Finance and Industrials Poised for Acceleration**
Deutsche Bank expects the profit expansion to broaden further across sectors, with 10 of the 11 S&P 500 sectors projected to achieve positive growth.
The Financials sector is forecast to see EPS growth surge to 19.9% from 10.8% last quarter, benefiting from continued improvements in net interest income, capital markets, trading, and insurance revenues. Growth for Industrial cyclicals is expected to rebound to 7.9% from 2.8%, driven by AI demand and initial signs of manufacturing recovery.
Consumer cyclicals remain a drag, projected to record a fifth consecutive quarter of negative growth, although the decline is expected to narrow to -1.6% from -7.5%. Defensive sectors are anticipated to return to positive growth, shifting from -1.1% to 4.3%, primarily due to reduced headwinds from managed care.
**Positioning and Geopolitical Risks: Key Variables for the Season**
Despite strong earnings fundamentals, institutional investor equity positioning currently aligns with expectations of a significant earnings downturn. Deutsche Bank notes that overall equity positioning has declined significantly and is at relatively low levels historically (around the 20th percentile). Positioning in the Financials and Technology sectors is particularly depressed, consistent with market expectations for a sharp deterioration in profits for these areas.
Goldman Sachs points out that positioning in the "Magnificent Seven" stocks is currently at its cleanest level this year, with net positioning at the 50th percentile over the past three years and gross positioning only at the 22nd percentile. Goldman Sachs trader Ryan Sharkey suggests that if geopolitical tensions ease during the earnings season, strong profit data could act as a catalyst for renewed investment inflows, potentially benefiting momentum longs, AI beneficiaries, and the Memory and Semiconductor sectors first.
Goldman Sachs also cautions that macro factors are likely to dominate over micro fundamentals this quarter. They expect individual stock price reactions to earnings reports to be weaker than the historical average, with both the reward for beats and the penalty for misses being lower than usual—a dynamic reminiscent of market behavior during the Q1 2025 tariff shock period.
The chief investment strategist at Empower stated, "The Iran situation has moved to the forefront of our focus, but other themes continue, and issues like AI disruption still warrant close attention. There are some unknowns we will need to live with for a while."
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