(Bloomberg) - Even as war in the Middle East roiled markets this month, some investors are finding solace in Corporate America’s growth machine, which not only remains intact — but is showing signs of thriving.
Sell-side strategists have been boosting their profit outlooks, defying concern over soaring oil prices and a potential hit to consumer demand. Earnings in the S&P 500 Index are expected to rise 20% in the next 12 months, data compiled by Morgan Stanley show. Historically, the reading was higher only when the economy emerged out of recessions.
“This supports our stance that the probability remains low for this oil spike to end the business cycle,” Morgan Stanley chief investment officer and chief US equity strategist Mike Wilson said in a March 23 note to clients.
Optimism over corporate earnings — the cornerstone of US equities’ bull-market run for most of the past decade — partly explains the S&P 500’s resilience in the face of intensifying fighting in the Middle East. The view is giving bulls reason to remain constructive on US stocks despite growing geopolitical risks, artificial intelligence disruption and private-credit stress.
The profit outlook for S&P 500 companies has been improving even as share prices have fallen — a dynamic rarely seen during episodes of geopolitical uncertainty, according to Wilson. The setup has historically rewarded investors willing to look through near-term pain. Instances when analysts revised their profit outlooks higher as the S&P 500 declined have typically preceded strong performance in US stocks, the firm’s data show.
Analysts estimate that S&P 500 companies will grow their profits by 11.9% in the three months through March, per data compiled by Bloomberg Intelligence. That compares to an estimate of 10.9% before the war in Iran started. Earnings and sales forecasts for the next three quarters have increased by 1.9% and 1.5%, respectively, according to BI figures gathered by strategist Wendy Soong, partly as the impact of tariffs continues to unwind.
Other Wall Street pros have been looking to corporate earnings for solace about the US equity outlook. Strategists at Barclays Plc on Tuesday upgraded their S&P 500 year-end target and earnings view, citing strength in the US economy and technology high-flyers.
The optimism is not without risks. Should oil trade at $110 a barrel for the rest of the year, earnings estimates for S&P 500 companies could shed as much as 5 percentage points, data from JPMorgan Chase & Co. show.
First-quarter earnings season, which kicks off with big banks’ scorecards in three weeks, will be the first real test of analysts’ bullishness. If elevated energy costs persist, they risk sapping consumer spending and putting a dent in companies’ profits that will make current estimates appear overly optimistic.
Earnings expectations tend to lag during periods of major uncertainty, according to Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions. He noted that analysts were slow to cut estimates in April, even as President Donald Trump’s sweeping tariffs sent stocks plunging.
“This is always what happens if you’re in the face of any sort of uncertain shock,” he said. “It takes time for that shock to then bleed into earnings estimates.”
Market stress has been building in recent weeks as war in the Middle East escalates with no clear offramp in sight. Investors have been counting on Trump to de-escalate the conflict, curbing more pronounced declines in risk assets. Trump signaled on Tuesday that Iran had offered a “present” as a show of good faith in negotiations, even as he deploys more troops to the Middle East.
“The market at some point is going to stop reacting to the rhetoric and really focus on the economic impact, which is a lot of dislocations are flowing through supply chains,” said Brad Conger, chief investment officer at Hirtle Callaghan. “When companies start to say, ‘Yeah, we’ve had to shift production or cut production or raise prices,’ or in other words, when companies start saying there are real-world impacts, then I think Trump becomes less important.”
By Alexandra Semenova and Matthew Griffin
