Unafraid of War Impact, Morgan Stanley: S&P 500 Component Stocks' Earnings Still Expected to Surge

Caixin News, March 25 (Editor: Xia Junxiong) Despite the Middle East conflict stirring the markets this month, some investors still see optimistic signals from the growth engine of U.S. companies. This engine remains robust and even shows signs of accelerating.

Recently, sell-side strategists have been raising earnings forecasts despite concerns over soaring oil prices and potential impacts on consumer demand. Data compiled by Morgan Stanley shows that the earnings of S&P 500 companies are expected to grow by 20% over the next 12 months. Historically, such figures are only higher when the economy emerges from a recession.

Morgan Stanley Chief Investment Officer and U.S. Equity Strategist Mike Wilson stated in a client report on March 23: “This supports our view that the probability of this oil price surge ending the business cycle remains relatively low.”

Optimism about corporate earnings has been a core pillar of the U.S. stock bull market over the past decade. This optimism remains firm and partly explains why the S&P 500 has maintained resilience amid escalating Middle East tensions. Therefore, despite rising geopolitical risks, AI disruptions, and increasing private credit pressures, bullish investors remain constructive on U.S. stocks.

Wilson pointed out that while stock prices have fallen, earnings expectations for S&P 500 companies have been revised upward. Such a situation is relatively rare during periods of geopolitical turmoil.

Historical experience shows that the combination of “earnings upgrades + stock price corrections” often benefits investors willing to tolerate short-term volatility. Data indicates that when analysts raise earnings forecasts during declines in the S&P 500, it usually signals strong subsequent performance for U.S. stocks.

Statistics show that analysts expect earnings for S&P 500 companies to grow by 11.9% in the first quarter of this year, higher than the 10.9% forecast before the Iran conflict erupted. Additionally, earnings and revenue forecasts for the next three quarters have been raised by 1.9% and 1.5%, respectively, partly due to the gradual easing of tariff impacts.

Other Wall Street institutions also view corporate earnings as a key support for the outlook of U.S. stocks. On Tuesday, Barclays strategists raised their year-end target for the S&P 500 and earnings expectations, citing a strong U.S. economy and robust performance of tech giants.

Risks Still Exist

However, this optimistic outlook is not without risks. JPMorgan estimates that if oil prices remain at around $110 per barrel for the rest of the year, earnings forecasts for S&P 500 companies could be cut by as much as 5 percentage points.

The Q1 earnings season in the U.S. will begin in three weeks, serving as the first critical test of market optimism. If high energy costs persist, they could suppress consumer spending and erode corporate profits, making current earnings expectations overly optimistic.

Garrett Melson, Portfolio Strategist at Natixis Investment Managers Solutions, noted that during periods of significant uncertainty, earnings forecasts tend to lag. He cited last April, when the large-scale tariffs imposed by President Trump caused a stock market plunge, analyst downgrades of earnings expectations were also relatively slow.

“This is often the case when facing any shock of uncertainty,” Melson said. “It takes time for these shocks to be fully reflected in earnings forecasts.”

As the Middle East conflict escalates with no clear path to de-escalation, recent market pressures continue to build. Investors hope that Trump can help de-escalate the situation to limit further declines in risk assets.

Although Trump signaled a potential easing this week and stated that the U.S. is in negotiations with Iran with the intention of reaching an agreement, his comments were rejected by Iran, which denied any negotiations with the U.S.

Meanwhile, media reports indicate that some units of the 82nd Airborne Division are about to be deployed to the Middle East.

Brad Conger, Chief Investment Officer at Hirtle Callaghan, said: “The market will eventually stop reacting to words and focus on actual economic impacts, such as supply chain disruptions. When companies start saying ‘we have to adjust production, cut output, or raise prices,’ that’s when the real impact becomes evident, and Trump’s influence will diminish.”

(Caixin, Xia Junxiong)