The first-quarter earnings season for U.S. stocks is about to begin, with Deutsche Bank forecasting that the S&P 500 earnings per share growth rate will reach 19%, marking a four-year high. NVIDIA and Micron alone are expected to account for over 50% of the overall earnings growth, with AI themes dominating this round of performance. However, escalating tensions in Iran, surging oil prices, and a rebound in inflation pose significant variables. Institutions generally believe that management’s forward guidance will be more important than the earnings figures themselves.
The first-quarter earnings season of the U.S. stock market is about to begin, with the market under multiple pressures from the Middle East situation, surging oil prices, and the wave of artificial intelligence. However, major Wall Street institutions generally hold an optimistic attitude toward this earnings season.
Deutsche Bank forecasts that$S&P 500 Index (.SPX.US)$the growth rate of earnings per share (EPS) in the first quarter will reach 19%, hitting a four-year high and surpassing the market consensus expectation of 16%. This will mark the sixth consecutive quarter of double-digit growth. Goldman Sachs also anticipates that this quarter’s earnings performance will exceed consensus expectations, noting that a 3% real GDP growth rate has historically been sufficient to support double-digit EPS growth.
It is worth noting that $NVIDIA (NVDA.US)$ and $Micron Technology (MU.US)$ These two companies are expected to contribute more than 50% of the overall EPS growth of the S&P 500, highlighting the dominance of AI investment as a key theme in this earnings season.
However, geopolitical risks and macroeconomic uncertainties form the significant backdrop of this earnings season. The conflict involving Iran has driven a sharp rise in oil prices, while U.S. inflation data in March recorded its largest increase in nearly four years, and consumer confidence continued to weaken. Meanwhile, both the MSCI World Index and the S&P 500 have just experienced their worst quarter since 2022. Institutions generally believe that forward-looking guidance and management commentary from companies this quarter will be more important than the reported earnings figures themselves.
Profit growth is expected to hit a four-year high, with consensus expectations already at historically elevated levels.
According to Binky Chadha, Chief Economist at Deutsche Bank, in the latest strategy report, bottom-up analyst consensus expectations indicate that the year-over-year EPS growth rate for the S&P 500 in the first quarter will accelerate from 13.4% in the previous quarter to 16.2%, breaking out of the wide range of 8.5% to 14% seen over the past two years and reaching the highest level in four years.
Chadha pointed out that it is extremely rare in history for consensus expectations to anticipate such strong growth before the start of an earnings season. Over the past two decades, there have been only three similar instances: twice during the deep recovery phases following the global financial crisis and the COVID-19 pandemic, and once due to the mechanical boost from corporate tax reform in 2018. This time, however, there is neither a favorable base effect nor policy-driven benefits, occurring against the backdrop of profits having grown strongly for more than two years.
Deutsche Bank’s own forecast is even more aggressive, expecting actual growth to reach 19%, slightly above the consensus but predicting that the extent of the upside surprise will be relatively moderate. Historical data show that final earnings typically exceed initial consensus expectations at the start of an earnings season by an average of 3.3%, or 4.9% if measured as of the reporting date. Among companies that have already disclosed results, the overall magnitude of the upside surprise is 17.5%, but this is mainly driven by Micron’s substantial beat; excluding Micron, the upside surprise is 5.5%.
Macroeconomic tailwinds and a weaker U.S. dollar provide key support.
Deutsche Bank attributes the drivers of robust earnings expectations to three factors: an acceleration in macroeconomic growth, currency depreciation benefits, and the continued deepening of the AI boom cycle.
At the macro level, Deutsche Bank economists forecast that the year-on-year growth rate of US GDP in the first quarter will be 2.9%, at the upper end of a robust range of 2.5% to 3% over the past six quarters. The ISM manufacturing index returned to expansion in the first quarter after being in contraction territory for three and a half years, while the services index rose to a three-year high.
In terms of exchange rates, the US dollar depreciated by an average of 6.8% year-on-year in the first quarter, marking the largest annual decline in about five years. Deutsche Bank estimates this contributed approximately 4.1 percentage points to the growth of S&P 500 earnings per share (EPS), with the energy, materials, large-cap growth technology (MCG & Tech), and industrial sectors benefiting the most significantly.
As for oil prices, despite a sharp surge in March due to the conflict in Iran, the average price in the first quarter increased by only about 2% year-on-year, providing a moderate boost to the profitability of the energy sector. Deutsche Bank pointed out that if oil prices remain high, they will significantly drive energy earnings in the second quarter and beyond, with the EPS growth rate of the energy sector potentially exceeding 100%.
NVIDIA and Micron: Two Companies Holding Up Half the Sky
The AI theme is the core narrative thread of this earnings season.
According to Goldman Sachs data, the largest AI-related heavyweights are expected to drive over 60% of the S&P 500’s first-quarter EPS growth, with NVIDIA contributing 3.3 percentage points and Micron contributing 2.7 percentage points, collectively accounting for more than 50% of the overall EPS growth.
At the sector level, Deutsche Bank expects the EPS growth rate of the large-cap growth technology (MCG & Tech) sector to accelerate from 27.5% in the previous quarter to 35.7%, led by semiconductor manufacturers; even excluding NVIDIA and Micron, the sector’s growth rate is still projected to be as high as 22%. Goldman Sachs noted that the information technology sector is expected to see EPS growth of 44%, solely contributing 87% of the S&P 500’s overall EPS growth in the first quarter.
Analysts expect hyperscale cloud computing companies to reach $149 billion in total capital expenditure in the first quarter, representing a year-on-year increase of 92%, though the growth rate will gradually slow down in subsequent quarters. Goldman Sachs estimates that investment in AI infrastructure will contribute approximately 40% of the S&P 500’s full-year EPS growth for this year.
Significant divergence across sectors, with finance and industrials showing potential for acceleration
Deutsche Bank expects this round of profit growth to further spread to more sectors, with 10 out of the 11 sectors of the S&P 500 likely to achieve positive growth.
The financial sector is expected to see a significant jump in EPS growth from 10.8% in the previous quarter to 19.9%, benefiting from continued improvements in net interest income (NII), capital markets, trading, and insurance revenues. The growth rate of industrial cyclicals is projected to rebound from 2.8% to 7.9%, driven by AI demand and an initial recovery in manufacturing.
Consumer cyclicals remain a drag, with expectations for a fifth consecutive quarter of negative growth. However, the decline is anticipated to narrow from -7.5% to -1.6%. Defensive sectors are expected to turn positive, shifting from -1.1% to 4.3%, primarily due to a reduced drag effect from managed healthcare.
Low Positioning and Geopolitical Risks: Two Key Variables in the Earnings Season
Despite strong earnings fundamentals, current institutional investors’ equity positions align with expectations of a significant decline in profitability. Deutsche Bank noted that overall equity positioning has dropped significantly, now at a relatively low level within the historical range (around the 20th percentile). Positions in the financial and technology sectors (especially software) are particularly subdued, consistent with market sentiment anticipating a sharp deterioration in earnings for these sectors.
Goldman Sachs pointed out that the positioning of the ‘Magnificent Seven’ (Mag7) stocks is currently the cleanest it has been this year, with net positions at the 50th percentile over the past three years and total positions only at the 22nd percentile. Goldman Sachs trader Ryan Sharkey believes that if geopolitical tensions ease during the earnings season, robust earnings data could act as a catalyst for funds to re-enter the market. Momentum longs, AI beneficiaries, storage, and semiconductor sectors may be among the first to benefit.
Goldman Sachs also highlighted that macro factors will dominate the market this quarter more than micro fundamentals. It is expected that individual stock price reactions to earnings will be weaker than the historical average, with both rewards for outperformance and penalties for underperformance likely below normal levels—a scenario similar to market behavior during the tariff shock in Q1 2025.
Marta Norton, Chief Investment Strategist at Empower, stated: “The situation in Iran has come to the forefront of our attention, but other themes continue. Issues such as AI disruption still warrant close monitoring. There are some unknown factors we will need to coexist with for some time.”
Editor/Rocky