By Ketki Saxena
Investing.com -- As major companies in the United States gear up to report their Q1 results, investors are bracing themselves for a possible economic downturn. According to FactSet's estimates, profits of businesses that make up the S&P 500 index are expected to fall almost 7% from last year's Q1 - marking a swift deterioration in predictions.
This decline would be the biggest since a severe slump caused by the COVID-19 pandemic early last year and also marks two consecutive quarters of decline.
However, some experts believe that it is too soon to see the full impact of March’s turmoil as it came so close to end-of-quarter reporting. Investors will focus on comments from bank chief executives and chief financial officers about what they've seen more recently and what they predict both for banks and the economy.
The banking sector has already experienced an upheaval with Silicon Valley Bank collapsing last month. The turmoil has prompted concerns among investors about how many customers transferred their deposits from smaller regional lenders to bigger ones like JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), and Wells Fargo (NYSE:WFC). And these questions are certainly likely to be voiced in earnings season, which those three big banks kick off with tomorrow.
While there is an overarching expectation of declining profitability across different sectors of the stock market vary widely; materials companies such as mining businesses face sharp declines due to fears over global growth sapping demand for commodities like copper and aluminum. In contrast, big oil producers like Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) are expected to report double-digit earnings growth for the fifth consecutive quarter.
Investors will also be watching for profit margins. In 2022, profit margins increased as consumers remained willing to pay the higher prices passed on by companies in the face of inflation.
However, this trend may not continue given rising interest rates which add pressure on costs for companies and consumers alike, while making it harder for firms to keep raising prices on their customers. Net profit margin is expected to fall significantly according to FactSet data.
Despite these challenges, stock prices remain buoyant, with some analysts suggesting that investors have already positioned themselves for bad news ahead which could help support market prices even as weak earnings reports roll in.
However, others argue that despite dire predictions about the economy and corporate profits last year - investors haven’t had to face a meaningful slump yet, and are currently overly optimistic despite the warning signs ahead of earnings season.