Morgan Wilson: Unfazed by Iran conflict, S&P 500 earnings are expected to grow by 20% in the next year

Ask AI · How will earnings season test the reliability of analysts’ optimistic forecasts?

Despite ongoing turmoil in the Middle East that continues to rattle the market, some strategists on Wall Street are shifting their focus to the resilience of U.S. corporate earnings—and viewing it as an important support for the stock market.

In a client note dated March 23, Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist at Morgan Stanley, said that over the next 12 months, earnings for S&P 500 index constituents are expected to grow by 20%—a level that historically has only appeared when the economy is emerging from a recession.

He said the probability that surging oil prices will end this business cycle remains relatively low. Meanwhile, Barclays strategists also raised their S&P 500 year-end target price and earnings outlook this Tuesday, citing strong performance from the U.S. economy and the impressive showing of technology bellwether stocks. This optimistic sentiment, to some extent, explains the resilience the S&P 500 has demonstrated amid steadily intensifying tensions in the Middle East.

Earnings outlook raised against the tide

Analysts are continuing to raise their earnings forecasts even as tensions in the Middle East persist.

Data from Bloomberg Intelligence shows analysts expect first-quarter earnings for S&P 500 index constituents to rise 11.9% year over year this year, higher than the 10.9% forecast before the outbreak of the Iran conflict. Aggregated data compiled by strategist Wendy Soong also shows that earnings and revenue expectations for the next three quarters have been raised by 1.9% and 1.5%, respectively—partly because the impact of tariff shocks continues to fade.

Morgan Stanley’s Chief Investment Officer Mike Wilson noted that a rare phenomenon is occurring right now: as S&P 500 index shares fall, corporate earnings forecasts are still being raised. Historical data suggests that whenever analysts raise earnings expectations during a period of stock market decline, U.S. stocks often go on to deliver strong performance afterward. This pattern provides historical support for investors willing to look past near-term volatility.

Risks can’t be ignored

The optimistic outlook is not without its downsides.

JPMorgan data shows that if oil prices remain at $110 per barrel for the rest of this year, earnings expectations for S&P 500 index constituents could be cut by as much as 5 percentage points.

Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions, cautioned that in periods of major uncertainty, earnings forecasts often lag. He noted that when the stock market crashed in April this year amid Trump’s large-scale tariff policies, analysts likewise took a long time to cut their forecasts. “With any uncertainty shock, it’s always like this,” he said. “It takes time for the shock to flow through to earnings forecasts.”

The first real test of analysts’ optimistic forecasts will come in the first-quarter earnings season that begins in about three weeks—marked by major banks being the first to disclose results.

Geopolitical conditions remain a key variable

Market pressure has been building over the past few weeks, as the Middle East conflict escalates and there is no clear channel to cool it down in the near term. Investors are looking to Trump to help de-escalate the situation in order to curb further declines in risk assets.

Brad Conger, Chief Investment Officer at Hirtle Callaghan, believes that the market’s sensitivity to political statements will eventually give way to attention on the impact on the real economy. “At some point, the market will stop reacting to rhetoric and will focus on shocks to the economy itself,” he said. “When companies begin to say they have to shift or cut capacity, or raise prices—that is, when companies start reflecting the impact of the real world—then Trump’s comments become less important.”