High hopes for profits is a risk for stocks

Expectations for Wall Street’s first quarterly earnings season of 2017 are high. And that could be bad for stocks.

Analysts see earnings for Standard & Poor’s 500 companies growing at a 10.2% pace in the January-to-March quarter, earnings-tracker Thomson Reuters I/B/E/S says, which would be the best since profits jumped 10.3% in the third quarter of 2014.

But those hopes could collide with stock market valuations that are above average, even pricey by historical standards. The S&P 500 is currently trading at more than 20 times last year’s earnings, Thomson Reuters data show, well above the average price-to-earnings ratio of roughly 15.

The risk investors face is if earnings don’t come in strong enough to warrant the lofty valuation Wall Street is currently placing on the broad U.S. market. Despite a lull that began in early March, stocks have been bid up sharply since the election of Donald Trump in November. At its March 1 record high, the S&P 500 was up 12% after Trump’s election. But it has pulled back about 1.5% since its peak. One reason for the rally stalling is the inability of the Republican-led Congress to repeal Obamacare, sparking fears Trump’s growthfriendly agenda was in jeopardy.

Earnings season may hinge on a big rebound in the energy sector, where profit growth is seen surging after losses a year earlier. The market will also fare well if financials and technology stocks deliver on expected growth of more than 15%.