Q1 Earnings Season To Be A 'Massive Wake Up Call' For Investors, Cautions Senior Analyst - SPDR S&P 500 (ARCA:SPY)

As the sense of optimism spurred by the Federal Reserve’s recent decision to hold interest rates fades away the first quarter earnings could surprise investors, predicts a seasoned analyst.

What Happened: The Fed’s forecast of two rate cuts this year, despite inflation not yet reaching the 2% target, has piqued investor interest. Dan Niles, founder of Niles Investment Management, in an interview with CNBC on Thursday, suggested that this move reinforces the notion of a “Fed put,” referring to the central bank’s perceived market support.

Despite an increased inflation forecast, the Fed’s commitment to rate cuts suggests it is disregarding rising inflation metrics. This has raised concerns, particularly in light of the Fed’s 2021 misjudgment of inflation as “transitory.”

Niles warned that the upcoming Q1 earnings season could provide a reality check for investors, with anticipated significant downward revisions in corporate guidance. Economic uncertainties, including concerns over trade policies and reciprocal tariffs effective from April 2, could deter businesses from making significant financial commitments.

“But I think Q1 earnings season is going to be a massive wake-up call. But in the near term, do I see more upside? Sure. Until companies have to start reporting,” stated Niles. The analyst also expects the upcoming earnings season to be ‘problematic’.

The first quarter often starts slowly due to the holiday season, with business activity picking up toward the end of March. However, given the looming tariff changes, companies might delay key decisions, exacerbating economic sluggishness, explained Niles.

Another troubling sign, as per Niles, is that earnings estimates were already on a downward trajectory before these recent concerns surfaced. In the fourth quarter, six out of the seven "Magnificent Seven" tech giants saw their forward revenue estimates reduced. Now, with additional economic uncertainties, this trend is likely to continue, if not accelerate.

Why It Matters: U.S. stocks surged on Wednesday after the Federal Reserve, as anticipated, left interest rates unchanged. Nevertheless, the Fed’s GDP growth projections indicate a worrying decline, from 2.1% to 1.7% in just two months. This sharp downward revision in such a short period is unusual, with the last similar instance during the COVID-19 crisis.

Notably, like Niles, Senior Economist Mohamed El-Erian also criticized the Fed’s use of the term “transitory” to describe potential inflationary impacts of tariffs.

While the Fed's actions have provided a temporary boost to the markets, underlying economic concerns remain. However, Niles cautioned that if economic fundamentals continue to deteriorate, investor sentiment alone may not be enough to sustain the rally. Investors should remain cautious and closely monitor corporate earnings and macroeconomic trends in the coming months, according to Niles.

The S&P 500 SPY climbed 1.78% to close at 5,662.89 on Thursday. The index dropped 3.5% year-to-date.