US Stock Q1 Earnings Preview: S&P 500 EPS Growth Expected to Hit Four-Year High, Just Two Companies Could Account for 50% of the Increase

US Stock Q1 Earnings Preview: S&P 500 EPS Growth Expected to Hit Four-Year High, Just Two Companies Could Account for 50% of the Increase

The US stock market's first-quarter earnings season is about to begin. The market is facing multiple pressures from the Middle East situation, soaring oil prices, and the wave of artificial intelligence, yet major Wall Street institutions generally hold an optimistic view towards this round of earnings.

Deutsche Bank expects the S&P 500's first-quarter earnings per share (EPS) growth rate to reach 19%, a four-year high, exceeding the market consensus estimate of 16%, marking the sixth consecutive quarter of double-digit growth. Goldman Sachs also expects earnings this quarter to outperform consensus expectations, believing that a 3% real GDP growth rate is historically sufficient to support double-digit EPS growth.

Notably, Nvidia and Micron are expected to individually contribute over 50% of the overall EPS growth of the S&P 500, highlighting the dominant role of the AI investment theme in this earnings season.

However, geopolitical risks and macroeconomic uncertainties provide important context for this earnings season. The Iran conflict has pushed oil prices sharply higher, US March inflation hit the largest increase in nearly four years, and consumer confidence has continued to weaken. Meanwhile, the MSCI Global Index and S&P 500 Index both just experienced their worst quarter since 2022. Institutions generally believe that forward guidance and management commentary from companies this quarter will be more important than the reported earnings data itself.

Earnings Growth Expected to Reach Four-Year High, Consensus Expectations Already at Historic Levels

According to Deutsche Bank Chief Economist Binky Chadha’s latest strategy report, bottom-up analyst consensus shows that first-quarter S&P 500 EPS growth will accelerate from last quarter’s 13.4% to 16.2%, breaking out of the wide oscillation range of 8.5% to 14% over the past two years, reaching the highest level in four years.

Chadha pointed out that it is extremely rare in history for consensus to expect such strong growth before earnings season begins. In the past twenty years, this has only happened three times: twice during the deep recovery phases after the global financial crisis and the Covid pandemic, and once driven by mechanical boosts from corporate tax reform in 2018. This time, the expectations come without favorable base effects or policy windfalls, formed against a backdrop of more than two years of sustained strong earnings growth.

Deutsche Bank's own forecast is more aggressive, expecting actual growth to reach 19%, slightly higher than consensus, but anticipates a more moderate beat than usual. Historical data show that final earnings on average exceed initial consensus by 3.3% at the start of earnings season, and 4.9% on the day of reporting. The overall beat rate for companies that have already reported stands at 17.5%, mainly driven by Micron's substantial beat; excluding Micron, the beat rate is 5.5%.

Macro Tailwinds and a Weakening Dollar Provide Key Support

Deutsche Bank attributes strong earnings expectations to three factors: accelerating macro growth, benefits from a weakening dollar, and the continued deepening of the AI business cycle.

On the macro side, Deutsche Bank economists expect US first-quarter GDP growth to be 2.9% year-over-year, 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 exchange rates, the US dollar weakened by an average of 6.8% year-over-year in Q1, marking the largest annual decline in about five years. Deutsche Bank estimates this contributed about 4.1 percentage points to S&P 500 EPS growth, with energy, materials, large-cap growth tech (MCG & Tech), and industrial sectors benefiting most.

Regarding oil prices, although oil prices spiked sharply in March due to the Iran conflict, the average price for Q1 was only up about 2% year-over-year, so the boost to energy sector earnings remains moderate for now. Deutsche Bank notes that if oil prices stay high, they will significantly drive energy earnings in Q2 and beyond, with expected sector EPS growth potentially exceeding 100%.

Nvidia and Micron: Two Companies Account for Half the Growth

The AI theme is the most central storyline of this earnings season.

According to Goldman Sachs data, the largest AI-related heavyweights are expected to drive more than 60% of the S&P 500's first-quarter EPS growth, with Nvidia (contributing 3.3 percentage points) and Micron (contributing 2.7 percentage points) together accounting for over half of the overall EPS growth.

At the sector level, Deutsche Bank expects large-cap growth tech (MCG & Tech) sector EPS growth to accelerate from last quarter's 27.5% to 35.7%, led by semiconductor manufacturers; even excluding Nvidia and Micron, the sector is still expected to grow by 22%. Goldman Sachs notes the information technology sector’s EPS growth is projected at 44%, independently contributing 87% of the S&P 500's overall Q1 EPS growth.

Analysts expect total Q1 capital spending by hyperscale cloud providers to reach $149 billion, up 92% year-over-year, but growth will slow quarter by quarter going forward. Goldman Sachs projects AI infrastructure investment will contribute about 40% of the S&P 500's full-year EPS growth.

Clear Sector Divergence, Acceleration Expected in Financials and Industrials

Deutsche Bank expects earnings growth to further broaden across more sectors, with 10 out of 11 S&P 500 sectors likely to achieve positive growth.

Financials sector EPS growth is expected to jump from last quarter's 10.8% to 19.9%, supported by continued improvement in net interest income (NII), capital markets, trading, and insurance revenue. Industrial cyclical stocks are forecast to rebound from 2.8% to 7.9%, driven by AI demand and an initial manufacturing recovery.

Consumer cyclical stocks remain a drag, expected to record negative growth for the fifth consecutive quarter, though the decline could narrow from -7.5% to -1.6%. Defensive sectors are expected to turn positive, rising from -1.1% to 4.3%, mainly due to the easing drag from managed care.

Low Positioning and Geopolitical Risks: Two Key Earnings Season Variables

Despite strong earnings fundamentals, institutional investors’ equity positions currently align with expectations of a sharp earnings downturn. Deutsche Bank notes that overall equity positioning has dropped significantly, sitting at the low end of its historical range (about the 20th percentile), with financials and tech (especially software) positions particularly weak, in line with market sentiment expecting sharp earnings deterioration in these sectors.

Goldman Sachs notes that the "Magnificent 7" current positioning is the cleanest all year, with net positions at the 50th percentile over the past three years, and overall positions at only the 22nd percentile. Goldman trader Ryan Sharkey believes that if geopolitical tensions ease during earnings season, strong earnings could catalyze renewed flows into equities, with momentum longs, AI beneficiaries, storage, and semiconductor stocks likely to benefit first.

Goldman Sachs also cautions that macro factors will be more dominant than micro fundamentals for the market this quarter, and predicts individual stock price reactions to earnings will be weaker than historical averages, with rewards for beats and punishments for misses both being below normal levels—similar to market performance during the Q1 2025 tariff shock period.

Empower Chief Investment Strategist Marta Norton said, "The Iran situation is now front and center in our outlook, but other themes are ongoing, and topics like AI disruption are still worth close attention. There are some unknowns, and we’ll have to coexist with them for a while yet."

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