US Stocks Q1 Earnings Preview: S&P 500 EPS Growth Expected to Hit Four-Year High, Just Two Companies Could Contribute 50% of Growth

The US stock market's first-quarter earnings season is set to commence, with the market navigating a complex landscape influenced by Middle East tensions, surging oil prices, and the AI wave. Despite these pressures, major Wall Street institutions maintain an optimistic outlook for this earnings season. Deutsche Bank anticipates that the first-quarter earnings per share (EPS) growth for the S&P 500 will reach 19%, a four-year high, surpassing the market consensus of 16% and marking the sixth consecutive quarter of double-digit growth. Goldman Sachs also expects this quarter's earnings performance to exceed consensus expectations, citing that a 3% real GDP growth rate historically supports double-digit EPS growth. Notably, NVIDIA and Micron are projected to individually contribute over 50% of the S&P 500's overall EPS growth in the first quarter, highlighting the dominant role of the AI investment theme in this earnings season. However, geopolitical risks and macroeconomic uncertainties form a significant backdrop for this earnings reporting period. The conflict in Iran has driven oil prices sharply higher, and US inflation data for March showed the largest increase in nearly four years, contributing to a sustained decline in consumer confidence. Concurrently, both the MSCI World Index and the S&P 500 recently experienced their worst quarter since 2022. Institutions widely believe that companies' forward-looking guidance and management commentary will be more crucial this quarter than the reported earnings figures themselves. Earnings Growth Poised for Four-Year High, Consensus Expectations Already at Historical Peak According to Binky Chadha, Chief Economist at Deutsche Bank, in a recent strategy report, the bottom-up analyst consensus forecast indicates that S&P 500's Q1 EPS growth will accelerate from 13.4% in the previous quarter to 16.2%, breaking through the wide range of 8.5% to 14% seen over the past two years and reaching the highest level in four years. Chadha notes that such strong growth expectations at the start of the earnings season are historically rare. Over the past two decades, this has only occurred three times: twice during deep recoveries following the Global Financial Crisis and the COVID-19 pandemic, and once due to the mechanical boost from the 2018 corporate tax cuts. The current expectation lacks a favorable base effect or policy stimulus, emerging after more than two years of sustained strong earnings growth. Deutsche Bank's own forecast is more aggressive, projecting an actual growth rate of 19%, slightly above consensus, but anticipates a more moderate magnitude of upside. Historical data shows that earnings ultimately outperform the consensus at the start of the earnings season by an average of 3.3%, and by an average of 4.9% based on the reporting day. Companies that have already reported have an overall outperformance of 17.5%, largely driven by Micron's significant beat; excluding Micron, the outperformance stands at 5.5%. Macro Tailwinds and a Weaker Dollar Provide Key Support Deutsche Bank attributes the strong earnings expectations to three main drivers: accelerated macroeconomic growth, the benefit of a depreciating dollar, and the ongoing deepening of the AI boom cycle. On the macroeconomic front, Deutsche Bank economists project US GDP to grow by 2.9% in Q1, at the upper end of the robust 2.5% to 3% range seen over the past six quarters. The ISM Manufacturing Index returned to expansion in Q1 after three and a half years of contraction, and the Services Index also rose to a three-year high. In terms of currency, the dollar depreciated by an average of 6.8% in Q1 compared to the previous year, marking its largest annual decline in approximately five years. Deutsche Bank estimates this contributed about 4.1 percentage points to the S&P 500's EPS growth, with the Energy, Materials, Mega Cap Growth & Tech (MCG & Tech), and Industrials sectors benefiting the most. Regarding oil prices, despite a sharp increase in March due to the conflict in Iran, the average quarterly price in Q1 rose by only about 2% year-on-year, providing only a mild boost to earnings in the energy sector so far. Deutsche Bank notes that if oil prices remain high, they will significantly drive energy earnings in Q2 and beyond, with projected EPS growth for the energy sector potentially exceeding 100%. NVIDIA and Micron: Two Companies Carry Half the Load The AI theme is the most critical narrative thread for this earnings season. According to Goldman Sachs data, the largest AI-related stocks are expected to drive over 60% of the S&P 500's Q1 EPS growth. NVIDIA (contributing 3.3 percentage points) and Micron (contributing 2.7 percentage points) together are projected to account for over 50% of the overall EPS growth. On a sector level, Deutsche Bank expects EPS growth in the Mega Cap Growth & Tech (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 is expected to be a robust 22%. Goldman Sachs points out that the Information Technology sector is projected to see an EPS growth of 44%, contributing 87% of the S&P 500's overall Q1 EPS growth. Analysts estimate that the total capital expenditure for hyperscale cloud providers in Q1 will reach $149 billion, a 92% year-on-year increase, although the growth rate is expected to slow down quarter by quarter thereafter. Goldman Sachs projects that AI infrastructure investments will contribute approximately 40% of the S&P 500's full-year EPS growth this year. Significant Sector Divergence; Financials and Industrials Poised for Acceleration Deutsche Bank forecasts that earnings growth this quarter will further spread across more sectors, with 10 out of the 11 S&P 500 sectors expected to achieve positive growth. The Financials sector is projected to see a substantial 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 Industrials sector is expected to rebound from 2.8% to 7.9% growth, driven by AI demand and an initial manufacturing recovery. Consumer Discretionary stocks are expected to remain a drag, recording negative growth for the fifth consecutive quarter, though the decline is anticipated to narrow from -7.5% to -1.6%. Defensive sectors are expected to turn positive, moving from -1.1% to 4.3%, primarily due to a reduced drag effect from managed healthcare. Low Positioning and Geopolitical Risks: Two Variables for the Earnings Season Despite strong earnings fundamentals, current institutional equity positioning aligns with expectations of a significant decline in earnings. Deutsche Bank notes that overall equity exposure has decreased significantly, resting at the lower end of its historical range (around the 20th percentile). Positioning in Financials and Technology (especially software) is particularly subdued, consistent with market sentiment expecting a sharp deterioration in earnings for these sectors. Goldman Sachs points out that the "Magnificent Seven" (Mag7) stocks are in their cleanest positioning year-to-date, with net positioning at the 50th percentile and gross positioning at only the 22nd percentile over the past three years. According to Goldman Sachs trader Ryan Sharkey, if geopolitical tensions ease during the earnings season, strong earnings data could serve as a catalyst for renewed fund inflows, potentially benefiting momentum longs, AI beneficiaries, storage, and semiconductor stocks first. Goldman Sachs also warns that macroeconomic factors will dominate the market more than micro fundamentals this quarter, anticipating that stock price reactions to earnings will be weaker than the historical average, with both upside rewards and downside penalties being smaller than usual – similar to market behavior during the tariff shock in Q1 2025. Marta Norton, Chief Investment Strategist at Empower, stated: "The Iran situation has moved center stage, but other themes are still playing out, and topics like AI disruption remain very much on the radar. There are some unknowns that we'll have to live with for a while longer."