Stocks are surging to new highs on the prospects of peace in the Middle East and what has so far been robust first quarter earnings results. But strategists say the key to further equity upside will be corporate outlooks.
Investors will be even more focused on guidance than normal and, "if there’s a crack in the story,” there’s a major risk to the market, said Walter Todd, chief investment officer at Greenwood Capital Associates.
Just one week into earnings season, outlooks are planting red flags. More analysts have been cutting their profit estimates than raising them. And the proportion of companies raising both earnings and sales outlooks has been declining simultaneously, according to 22V Research. The pattern has occurred "during periods of significant shifts in guidance,” including the financial crisis in 2008 and the pandemic period in 2021, according to 22V. Both periods were preceded by brutal bear markets.
The slowing pace of growth in earnings and sales forecasts shows that companies are less ebullient about the future given uncertainty from weaker consumer demand, as well as input costs due to rising inflation expectations.
Furthermore, firms are trimming guidance amid the Iran-war induced oil price shock, US tariff policies and the potential threats from artificial intelligence tools. Already, 40 companies in the S&P 500 Index have lowered their quarterly views, the highest level since the second quarter of 2025 at the onset of tariffs, data compiled by Bloomberg Intelligence show. BI described guidance momentum as "weaker” now than it was in the final quarter of 2025.
"If guidance disappoints, we could find ourselves back to where we were prior to this rally, down 5% to 10%,” said Todd.
Investors are already punishing firms that have reduced forecasts. Abbott Laboratories fell to the lowest level since 2023 after cutting its profit guidance on Thursday. JPMorgan Chase & Co slipped after lowering its net interest income outlook Tuesday. And Netflix Inc plunged on Friday after giving a lackluster second-quarter estimate.
In each case, outlooks overshadowed first-quarter results that beat expectations. "The market always cares way more about the guidance,” said Thomas Martin, partner and senior portfolio manager at Globalt Investments LLC.
Companies that have withdrawn outlooks altogether are being punished even more. Consider Canadian recreational vehicle maker BRP Inc, which pulled forecast Wednesday as a result of changes to US tariff policy, and saw its shares plunge 35% in Toronto. French train maker Alstom SA saw its shares plunge as much as 36% on Friday after retracting its own guidance.
"If you’re unwilling to provide guidance, it suggests a certain level of vulnerability,” said Marta Norton, chief investment strategist at Empower.
Norton said companies will try to provide forecasts in earnings season fraught with geopolitical, trade and economic uncertainty, albeit "with a wider range of outcomes.”
Terry Sandven, chief equity strategist at US Bank Wealth Management, expects earnings growth guidance "to be muted primarily because management is taking a wait-and-see approach.” Expect more detailed and aggressive outlooks in July as the outcome of the Iran war and tariffs become clearer, he added.
The net effect is that swings in single stocks remain elevated. While broad equity market volatility has dropped to the lowest level since early February on US-Iran peace talks, the Cboe S&P 500 Constituent Volatility Index, which tracks expected volatility of each component of the equity benchmark, is still sitting above its pre-war levels.
Lackluster outlooks stand in stark contrast to expected earnings growth in the first quarter, which is projected to come in at 12% for the S&P 500 stocks, BI data show. So far, earnings season is off to a strong start. Companies in the S&P 500 that have disclosed their results so far have seen their profits come in 11% above expectations, on aggregate.
The current backdrop is reminiscent of the first quarter of 2025, when US President Donald Trump’s sweeping tariff rollout led dozens of S&P 500 member companies to trim their outlooks. At that time, the S&P 500 saw 13% earnings growth, with 62 index members lowering their guidance, the most in a decade.
This time around, however, ongoing uncertainties provide companies with even less clarity, according to Michael O’Rourke, chief market strategist at JonesTrading Institutional Services LLC.
"You’re not going to get the visibility” that comes in a normal earnings season, O’Rourke said.