Profits among companies listed on the Standard & Poor’s 500 index will report an average 6.8-percent drop in first-quarter earnings compared to the same period last year, data firm FactSet predicted.

That would be the sharpest drop in quarterly profits since early 2020, when profits plunged 30 percent after anti-COVID lockdowns were implemented.

Costs of capital, labor, and materials are up; customers are delaying or foregoing purchases as prices and interest rates rise and the economic future is murky.

While sectors such as energy and consumer staples are expected to do well this earnings season, weak demand, more stringent lending criteria, and sinking commodity prices are expected to take a toll across a wide swath of industries.

Of the S&P’s 11 sectors, materials is expected to do worst, posting a decline in profits of 35.6 percent.

“Normally you see materials prices and profits swing in anticipation of a recession,” Brad McMillan, chief investment officer at Commonwealth Financial Network, told the FT. “Companies are cutting back in anticipation of slower sales.”

“When you look at the cost of wages and the cost of capital, margins are coming under a fair amount of pressure,” Jack Ablin, Cresset Capital’s chief investment officer, told the FT.

“Companies were enjoying nominal growth, they had some pricing power, but their volumes were either shrinking or staying the same,” he noted.

Although the S&P has climbed about 6.9 percent this year, about 90 percent of that gain is due to just 20 of the 500 stocks the index contains. 

Most of those 20 are tech firms that have benefited from assumptions that interest rates will fall this year.

Seventy-eight S&P companies have warned that profits will be lower in this year’s first quarter, 37 percent more than the five-year average number of firms doing so, the FT noted.

Eleven of those warnings came from semiconductor manufacturers.

New U.S. orders for durable goods—those expected to last at least three years—fell in February for the second consecutive month; analysts had expected an upswing.

As demand for goods slumps, the service sector is expected to shine in this earnings season. Analysts project a 34-percent growth in earnings, led by the hospitality sector, including airlines.

TRENDPOST: Last week’s earnings announcements were led by three of the biggest U.S. banks reporting stellar results.

Thanks to the U.S. Federal Reserve’s rate hikes, Citigroup boasted a 23-percent leap in net interest income. That figure soared by 49 percent at JPMorgan Chase and 45 percent at Wells Fargo.

In announcing the windfall, JPMorgan boosted its 2023 revenue forecast for that line item from $73 billion to $81 billion.

It was the Fed’s interest-rate increases that sank Signature and Silicon Valley banks in March and that has left banks holding more than $600 billion in unrealized losses, most of them at small and regional banks.

After the banks failed, many depositors shifted their money to banks “too big to fail,” such as Morgan, which reported a surprise 2-percent increase in funds on deposit.

The current economic turmoil will continue to exacerbate the loss of the American middle class, with Bigs amassing more wealth and property and the rest struggling harder to grasp the increasingly elusive “American dream.”

Also, as we note in the ECONOMIC UPDATE section, the earnings report is coming in a bit stronger than the market anticipated last week. We continue to note that the higher interest rates will take time to impact economic growth but that “time” will be hitting The Street by next month and will worsen if the Fed raises interest rates 25 basis points.