McGeever: Wall Street's fantasies about earnings may be a harsh reality soon.

There's something not quite right. Geopolitical risks are out of control. U.S. Oil prices have increased over 70% in the past year. Inflation is still above 3%. Wall Street's outlook for earnings could not be more rosy.

The Nasdaq has risen since the Iran War began on February 28. And the broader 'S&P 500 doesn't lag behind. It's as if the last six weeks never happened.

Even if the fragile ceasefire in the Middle East turns into a permanent cessation of hostilities, a very big "if", the economic damage and the price impact will last for many months or even years.

All of these factors are subject to debate, including their magnitude, duration and impact on the U.S. Economy. Their existence is not in doubt.

Bank of America's economists summarize it well: "Even if ceasefire continues, we are unlikely return to pre-war scenarios."

Wall Street thinks we are headed in that direction.

HIGH HOPES

The stock market's indifference shouldn't be a shock, since Wall Street has shown itself to be surprisingly bulletproof despite the turmoil of Donald Trump's second presidential term. It was amazing to see the stock market recover from its "Liberation Day tariff turmoil" a year ago. The Wall Street's resilience to shocks was demonstrated, as were investors' confidence in artificial intelligence.

The LSEG consensus estimate of 13.9% growth year-over-year in?first-quarter earnings is reasonable. This would be consistent with the last four quarters, and could help justify Nasdaq's and S&P 500’s return to their pre-war levels.

However, the outlook for this year is even more confusing.

The consensus forecasts for the remaining three quarters of earnings growth are respectively 20%, 22% and 19.9%. Tajinder Dhillon is the head of earnings at LSEG. He says that this would be the best growth for U.S. corporate profits since 2018 excluding the pandemic year of 2021.

If corporate America is to achieve such rapid profits, it must overcome an increasing number of obstacles.

Economic Clouds Darken

There is a definite smell of stagflation in the air.

The Consumer Price Index report released on Friday revealed that gasoline prices rose by?21% in March, while diesel and other motor fuels also increased by more than 30%. Both of these were record increases.

Consumers have never felt more downbeat. According to a survey released by the University of Michigan on Friday, consumer sentiment has reached its lowest level ever.

Why? It's not hard to understand. This year's growth will be lower than what it would have otherwise been.

Bank of America economists have revised their growth forecast for the U.S. Gross Domestic Product (GDP) by 50 basis points, to 2.3%. This is a major revision. The Bank of America economists also increased their personal consumption expenditures (PCEs) inflation forecast by 70 basis points to 3.1%.

This may be an optimistic estimate: With oil prices 70% higher than a year earlier, headline inflation could creep up to 4% and move even further away from the Federal Reserve’s 2% target.

The expected path for U.S. rates has changed. Futures markets predicted 60 basis points of easing in December at the beginning of the year. These expectations are now gone, and it appears that the Fed will be moving in a direction of a hike rather than a cut. This was unthinkable six weeks ago.

All of this is not set in stone. Consumer sentiment is no longer a good indicator of actual spending, and the economy has become less oil-intensive.

It would still be amazing if all of this did not affect profits.

The tech industry is expected to drive a large portion of the earnings boom. In the first quarter of this year, earnings for the tech industry are expected to increase by 46%. This means that the sector will account for almost 80% (or $74 billion) of the total expected profit growth.

Big Tech, with its $800 Billion capital expenditure plans for energy-intensive data centres and other artificial intelligence infrastructure in this year -- much of which is debt-financed -- now has a keen awareness of both the rising cost of energy and money.

Wall Street's optimism is striking. Now the question is whether or not corporate guidance in the next few weeks will deflate those high expectations.

Save the date! On April 23, at?9 a.m. ET /0100 GMT ROI columnists Mike Dolan & Jamie McGeever, will be joining LSEG in a webinar, "ROI Markets: Rethinking Safe Havens in Uncertain Times". Sign up by clicking here.

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(source: Reuters)