There has been a divergence on Wall Street. As stocks have approached new highs, expectations for company profits have darkened considerably.
Now, with corporate America starting to report first-quarter earnings, stock investors will find out if they ought to restrain their enthusiasm.
During the first three months of the year, Wall Street analysts slashed their forecasts for S&P 500 companies’ first-quarter earnings by 7.2 percent, according to the data provider FactSet.
The forecasts typically fall as the quarter progresses and analysts get a better sense of how the businesses are performing. But the decline during the first quarter was more than double the typical drop, and the largest cut to earnings estimates during a quarter since the start of 2016.
The analysts tracked by FactSet now expect companies in the S&P 500 as a whole to report that profits fell 4.2 percent from a year earlier. It’s a reflection of the slowing global economy, rising costs related to tariffs and wages, and the fact that tax cuts last year, which lifted growth substantially, are now baked in.
The souring sentiment around corporate profits has been fairly broad. Seven of the S&P 500’s 11 sectors are forecast to report lower earnings.
Corporate profits are typically among the most reliable guides to the future direction of the stock market. And yet American stocks are off to their best start in two decades. The S&P 500 is up about 15 percent this year.
“The market has perhaps gotten a bit ahead of itself,” said Kurt Spieler, the chief investment officer at First National Bank of Omaha’s wealth management business. “You need earnings growth to resume. If it doesn’t, there’s a risk of a correction.”
So why are stocks rallying as earnings expectations tumble? In part, this is simply a reversal of what sent the S&P 500 tumbling about 9 percent in December: hand-wringing about trade, interest rates and slowing global growth.
Since then, the Federal Reserve has put further rate increases on hold, and the United States and China have inched closer to a trade deal.
It could be that markets will return to the dynamic that drove stocks higher for most of the decade since the financial crisis: lackluster profit growth that is just good enough to keep stocks grinding higher in a low-rate, low-growth environment.
But investors are about to hear from executives and take in company forecasts about the future, and those can push stocks higher or lower.
“What will matter is what C.E.O.s say on the conference calls,” said J.J. Kinahan, the chief market strategist at TD Ameritrade. “How do they see tariffs affecting their business? And what are the implications if negotiations drag on.”