Markets turn to earnings season for good news

NEW YORK -- After weeks of dispiriting talk about trade wars and the threat of inflation, Wall Street is looking forward to some good news: eye-popping profits from Corporate America.

Analysts expect companies in the S&P 500 to report a 17 percent jump in earnings per share for the first three months of the year, thanks in large part to lower tax rates and the strong global economy. That would mark the best quarter of growth in seven years, according to FactSet.

A lot is riding on whether companies can follow through. U.S. stock indexes just closed out their first quarter of losses since the summer of 2015 and followed with a rough start to April.

Here's a look at some of the trends shaping the first-quarter reporting season, which really gets going Friday, when JPMorgan Chase and other big banks offer their reports:

• How much will inflation bite?

Years of low inflation allowed companies to keep a tight lid on their costs and to wring ever more profit from each $1 in revenue. That trend may be shifting.

The unemployment rate is at a 17-year low, which raises the fear companies will have to hand out bigger raises to retain workers. That would eat away at profit margins, which are close to record highs for S&P 500 companies. Average hourly wages rose 2.7 percent last month, up a tick from 2.6 percent in February.

Costs are rising elsewhere, too. General Mills, the maker of Cheerios and Yoplait yogurt, recently lowered its projection for full-year profit growth as it grapples with increasing expenses for everything from fruits to nuts to freight. The forecast sank not only its stock but also shares across the food industry.

• How much of the profit improvement is solely because of lower tax bills?

A lot of it is because of the tax-law change. When ignoring taxes, analysts' estimates for many companies' profit margins have actually fallen, with the steepest drops for health care companies and businesses selling discretionary items to consumers, according to strategists at Goldman Sachs.

But analysts are forecasting another quarter of revenue growth for companies because of the healthier global economy. Many investors see profit gains tied to stronger sales as more durable compared with those due solely to cost-cutting.

Technology companies will be under scrutiny because that's where expectations for revenue growth are close to the highest. Analysts are calling for gains of more than 10 percent for a wide range of companies, from Apple to PayPal.

• Are expectations too high?

Analysts have historically reduced their forecasts as earnings season approaches, giving companies a lower hurdle to jump over.

This quarter is different. Over the last three months, analysts have raised their forecast for S&P 500 earnings per share in the first quarter by about 5 percent. That is the largest increase in earnings forecasts for a quarter since FactSet began tracking the statistic in the spring of 2002.

It raises the possibility companies may not be able to match expectations. During earnings season, the barometer for companies' success is whether they met, beat or fell short of expectations.

Strategists at J.P. Morgan aren't too concerned. They say the first-quarter results "should provide clarity and validation of tax cut gains to corporates, helping broaden stock leadership and fueling" a catch-up rally in some of the areas of the market hardest hit recently.