Investors eye a high mark in U.S. profit growth as inflation fears deepen

By Caroline Valetkevitch

NEW YORK (Reuters) - Investors are looking ahead to an expected spike in June-quarter profits and the outlook for future economic growth to support a record-high stock market that has many traders fearing a selloff.

For second-quarter earnings, which begin next month, analysts are expecting a 64% jump over a year ago, the biggest increase for any quarter since the financial crisis in 2009, according to IBES data from Refinitiv.

But investors may be difficult to impress after the first-quarter's blowout results, with many fretting about inflationary pressure that could push the Federal Reserve toward raising interest rates.

With inflation worries rising, investors will keep a close eye on the impact of higher input costs on profit margins.

Hotter-than-expected inflation fears hit the market this week after the Fed hinted it could tighten monetary policy sooner that many investors anticipate.

The next earnings season is still weeks away, but there is a good chance that results will be even stronger than current estimates, said Jonathan Golub, chief U.S. equity strategist and head of quantitative research at Credit Suisse Securities in New York.

"Right now companies are able to pass on all of the higher input costs to their customers, so profit margins are under no pressure at all," he said, noting if earnings are likely to surprise to the upside, price-to-earnings ratios "are likely overstated."

The S&P 500 is up 11% in 2021, near record highs. Yet the index is trading at 22 times forward earnings, below the 23.5 times at the start of the year, according to Refinitiv.

Many companies raised their second-quarter estimates during the first-quarter profit season, Nick Raich, CEO of the Earnings Scout, wrote in a note.

"While it is still too early to know for sure, it does appear that the positive earnings momentum will persist in the 2Q 2021 period" and into the second half of 2021, he wrote.

Next year's outlook is less clear. S&P 500 earnings are currently projected to increase 36.5% in 2021 and 11.7% in 2022, according to Refinitiv.

Investors have flocked to areas of stocks that tend to benefit the most from economic growth since the recovery from the pandemic began last year, but the issue has become "how sustainable will growth be," said Eric Freedman, chief investment officer at U.S. Bank Wealth Management in Minneapolis.

"There are concerns about what Q1 and Q2 of next year will look like," he said. "Perhaps that reflation trade has gotten ahead of itself, and I think that's the message you're seeing from markets right now."

(Reporting by Caroline Valetkevitch in New York; Editing by Matthew Lewis)