Analysts expect companies to report slower growth in profits for the first quarter as rising commodity prices dent profit margins and risk hitting consumer spending.
Earnings per share for companies in the S&P 500 index grew 41 percent in 2010 following a sharp slowdown in 2009, according to Thomson Reuters, but are forecast to grow just 13.6 percent in the first quarter compared with the same period a year ago.
However, many strategists believe that results may be better than anticipated. Forecasts have been raised for materials groups – such as Alcoa, which on Monday will become the first S&P company to report earnings for the quarter.
Materials groups’ earnings per share are now expected to grow by 44 percent versus the first quarter of last year, thanks to rising prices for metals, oil and grains. Energy groups’ earnings are expected to grow by 23 percent.
However, rising input prices could hurt other sectors. Estimates have been lowered for consumer discretionary companies and staples, on fears that shoppers will be hit by higher petrol prices.
Nevertheless, both sectors are expected to increase earnings by just over 10 percent year-over-year as the labour market improves.
In the fourth quarter, consumers and businesses proved surprisingly willing to pay for price increases passed on to them.
S&P 500 companies’ gross profit margins did shrink, but by just 1 percent, compared to an average decline of 7 percent in fourth quarters since 1999, according to UBS.
A similar willingness could see last quarter’s 5 percent positive earnings surprise for large-cap stocks repeated.
“What is driving surprises are margins,” said Jonathan Golub, US equity strategist at UBS.
“The swing factors are energy and materials, as analysts tend to undershoot big rises in earnings.” Utilities are expected to see earnings shrink by 4.7 percent versus last year, as they are often limited by law how much they can raise prices.
Financials could surprise to the upside. Wall Street executives say trading profits are likely to fall short of the record levels touched a year ago, when pent-up demand following the crisis led to a fee bonanza.
But spikes of activity, in part driven by fears over Japan and the Middle East, may drive strong gains compared with the fourth quarter.
Banks with retail and commercial operations, such as JPMorgan – the first bank to report this week – will also benefit from the improvement in the financial health of US consumers and companies, which will enable banks to release reserves set aside for bad loans.