Beneath a solid fourth-quarter earnings season, there’s a worrisome development that may put a dent in the bull case for US stocks: Corporate America’s profit outlook is souring.
Among companies that have issued guidance for next quarter and beyond, more have provided estimates that trail analysts’ expectations. A gauge of forward earnings that compares companies’ forecasts with analysts’ projections is the lowest in a year after plunging to a level last seen in 2016 earlier this month, data compiled by Bloomberg Intelligence show.
There’s plenty of reasons for doubt. A full-fledged trade war will likely weigh on export demand and overseas profits of multinational firms. At home, inflation remains sticky and the US Federal Reserve appears in no rush to cut interest rates.
“The uncertainty entering this year is as great as it has been in years and executives are trying to navigate through that with more modest guidance,” said Jim Tierney, chief investment officer of concentrated US growth at AllianceBernstein. “Fourth-quarter earnings results are strong, but it didn’t fully follow through to 2025 guidance.”
Historically, stocks tend to react more to guidance than actual results, and traders reward companies that delivered better-than-expected forecasts. Companies that guided higher on profit and sales this earnings season have outperformed the S&P 500 Index by 6.7% within a day of reporting results — the second-most since early 2020, BI data show.
Of course, C-suite executives may prove to be conservative in their projections in the coming months, setting the stage for a rally since reduced earnings estimates would lower the bar for companies to clear. Meanwhile, analysts have been hesitant to revise their outlooks for this year and beyond until more companies deliver profit guidance. Just 80 companies in the S&P 500 have issued first-quarter outlooks so far.
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“This is the classic dance of Wall Street analysts and company guidance, where very ambitious estimates are put in place from the sell side and companies guide them to beatable numbers,” said Patrick Armstrong, chief investment officer at Plurimi Wealth. “The big question is when will tariffs have real teeth?”
Even analysts’ outlook for all of 2025 for the S&P 500 has steadily fallen since the start of the year. They see S&P 500 companies growing profits by 10% this year, down from nearly 13% in early January, according to data compiled by BI. Though for 2026, forecasts haven’t budged, with analysts anticipating that profits will still climb by 14% next year.
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“Trump will always create volatility for markets, but if you look at the underlying fundamentals for earnings growth, things are still really strong,” said Nancy Tengler, chief executive of Laffer Tengler Investments.
The stock market is forward looking so traders are discounting what’s going to happen at least six-to-12 months out. As profit margins continue to recover after being squeezed by inflation that’s eroded companies’ ability to pass on costs to consumers by raising prices, investors remain optimistic about earnings growth in 2026.
It’s an encouraging prospect for a market that is brushing up against record highs even as the Fed signals it intends to keep rates higher for longer.
The risk, however, is that inflation will remain stickier than expected, forcing monetary officials to reconsider interest-rate easing. Consumers are already pulling back on spending amid higher prices with retail sales slumping in January by the most in two years.
Investors will read the first tea leaves from retailers Thursday, when Walmart delivers results before the market opens, providing investors with crucial insight into consumer strength, economic growth and corporate profitability. Home Depot and Lowe’s. follow the next week, then Target and Nordstrom on March 4.
Charts: Bloomberg
