How earnings results could give a boost to your 401(k)

Trade war tensions got your 401(k) down in the dumps?

Don’t despair. The unsettling threats between Presidents Trump and Xi Jinping of China over tariffs that have periodically tanked stocks may soon give way to a more bullish narrative: the best quarter for corporate profits in seven years.

Wall Street is hoping that strong earnings results from corporate America can shift cocktail-party conversations from U.S.-Chinese trade tensions to more upbeat news about the good things still happening in the economy.

Financial analysts, who on Jan. 1 were forecasting profit growth of just more than 12% in the first three months of the year, now project that profits for companies in the Standard & Poor’s 500 stock index should rise nearly 19% for that same period, according to earnings-tracker Thomson Reuters. If those lofty expectations are met, it would mark the best growth since the first quarter of 2011.

The earnings reporting season unofficially kicks off Friday as some of America’s biggest banks, including JPMorgan Chase, Wells Fargo and Citigroup, tell investors how they performed at the start of the year. Those results will also be the first since the passage of a new tax cut in December slashed the corporate tax rate to 21% from 35%.

The tax benefits will be responsible for a big chunk of the expected profit growth. Credit Suisse, for example, noted that without the cuts, first-quarter profit growth would have been 11.4%, instead of the nearly 19% gain.

If companies can top the high expectations, that success could provide a much-needed lift for the stock market.

“Any positive surprises tied to earnings, or uplifting updates from CEOs, could provide the market some healthy distraction from its near obsession” with tit-for-tat tariff rhetoric from Trump and Beijing, says John Stoltzfus, chief investment strategist at Oppenheimer Asset Management.

Here are three ways a strong first- quarter earnings season could provide a lift to 401(k) account balances:

❚ Pivot to more positive story: Speculation about whether a full-fledged trade war will or won’t occur and what the economic fallout might be if the U.S. and China can’t resolve their disagreements have weighed on markets for more than a month and overshadowed positive news about the economy.

“Investors will soon shift their focus to the first-quarter earnings season,” David Kostin, chief equity strategist at Goldman Sachs, notes in his earnings preview.

Wall Street is hoping that good news on profits will drown out negative news on trade. The bullish scenario for stocks, Kostin says, is if profits come in better than expected, which “would confirm investors’ existing confidence” in the health of the economy and corporate profits.

❚ Earnings wins boost stock prices: Typically, shares of companies that top Wall Street profit forecasts rise in value. So the more companies that top estimates, the better the odds of a market rebound.

Company results normally come in higher than expected. On average, companies in the S&P 500 index collectively beat forecasts by three or four percentage points. If that happens again, it would boost the already high projection of 18%-plus growth to more than 20%. “We have arrived at an important juncture for this market,” says David Joy, chief market strategist at Ameriprise Financial. “We will soon learn if earnings are as strong as forecast and whether that is enough to not only stabilize stock prices, but push them higher.”

❚ Higher profits mean lower valuations: The most common metric used to gauge whether stocks are pricey or cheap is the price-to-earnings ratio. The market P-E, because of recent sharp declines, has already fallen from 18.5 times earnings to 16.4 times earnings, which puts it much closer to its 30-year average of 15.5, Thomson Reuters data show.

A stream of even stronger incoming profits would make the market appear even cheaper. And a less-expensive market is likely to attract more buyers.