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Wall Street expects the best results in 3 years

In the United States, the corporate earnings season for the first quarter of this year has started, and analysts expect nothing more than a spectacular return of impressive results. However, this opens up a relatively large space for disappointment, which may arrive despite the recovering economy. This can be a problem for markets that currently seem fragile and are at record highs.

Expected profit growth of 24.5%

At the beginning of April, Wall Street predicted year-on-year growth in blue chip earnings from the S&P 500 index of 24.5 %. If expectations really meet reality, this will be the strongest quarter since 2018. However, the results are usually higher than expected, and FactSet analysts expect profits to rise by more than 28 %, the highest in 10 years. In December, analysts expected growth of 15.8% which was in most cases met with better results than expected.

Better analyst expectations are supported by the very rapid pace of vaccination in the United States and subsequent rapid return of American consumption. In March, retail sales grew by less than 10%, strongly supported by Joe Biden's fiscal package, which included direct checks to US households. Everything is supported by better economic hard data, but some investors rightly warn that too high expectations can cause problems for markets in the end. If optimism is too high, markets can correct despite the very good results.
 

Chart: WallStreet analysts' expected quarterly results (Source: FT.com)
 

Is there a room for correction?

Analysts may have laid the groundwork for a possible correction in the markets. Most markets are close to or at their historical highs and the confidence that investors place in the current trend is the highest in the last 3-5 years. In the last three quarters, the markets have got used to better-than-expected results. The companies managed to exceed the expected results by more than 10 % in these quarters, and the damage caused by the pandemic turned out not to have affected the profitability of the companies too much.

So the bar is really high and even the biggest optimists are sometimes questioning the health of the current bull trend. All this creates room for a possible correction, but given the results we have received so far, it will not be a correction greater than 10 %. It will be rather healthy for the markets and several investors will use higher prices to close profits and use the correction again to buy at lower prices. Slightly worse results may be welcomed in the end.