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

There's something not quite right. The geopolitical risks are out of control. U.S. Oil prices have risen by over 70% in the past year. Inflation remains at 3%. Wall Street's earnings outlook could not be more rosy.

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

Even if the Middle East ceasefire is a temporary one - and that's a big if - the price impacts 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 lack of surprise is not surprising in some respects, since Wall Street has shown itself to be remarkably bulletproof despite the turmoil caused by Donald Trump's second presidential term. The stock market's?recovery after his "Liberation Day tariff turmoil" a year earlier was astounding. This showed how Wall Street is resilient to shocks, and how investors have confidence in artificial intelligence's ability to generate profits.

The LSEG consensus 'forecast of 13.9% growth year-over-year in first quarter earnings appears 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.

The outlook for this year is less clear.

Consensus estimates for the next three quarters of earnings growth are 22%, 19.9% and 20% respectively. 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 2021's pandemic-distorted year.

If corporate America wants to make profits so quickly, it must overcome an increasing number of obstacles.

Economic Clouds Darken

There is a stagflation odor in the air.

Consumer Price Index Report on Friday revealed that gasoline prices in March rose 21% month-over-month, while diesel and other motor fuels soared over 30%. Both increases were records.

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: oil is now 70% more expensive than a year earlier, and headline inflation could creep up to 4%.

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 or a cut - something which was unthinkable six weeks ago.

All of this is not set in stone. The economy is less oil-intensive now than in the past, consumer sentiment increasingly does not match actual spending patterns, and businesses could be resilient if these short-lived shocks do not persist.

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.

The optimism on Wall Street is surprising. Now the question is whether or not corporate guidance in the coming weeks will deflate those high expectations.

Save the date! On April 23, at 9 a.m. Mike Dolan, a columnist for ROI, and Jamie McGeever, a journalist with LSEG, will be joining LSEG in presenting LSEG's webinar, "Markets Unpacked With Open Interest: Rethinking Safe Havens In Uncertain Times." Sign up here.

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(source: Reuters)