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As the country’s largest companies prepare to report their results for the start of the year — offering a view into how the economy is faring as a banking shock reverberates — they’re already warning investors to brace themselves.

For the big businesses that make up the S&P 500 index, Wall Street’s forecasters expect that profits in the first three months of 2023 fell almost 7% from a year earlier, according to estimates collected by FactSet. That would be the second consecutive quarterly decline, and the biggest since a severe, although brief, slump in the early days of the coronavirus pandemic in 2020.

The forecast marks a swift deterioration in predictions. At the start of the year, the consensus was that profits would be roughly in line with the first quarter of 2022. But since then, continuing worries about inflation followed by a flare-up in the banking sector in March have soured the outlook.

Businesses have also told investors to dial down their expectations, with 78 companies in the S&P 500 offering guidance about their results that is below the average Wall Street estimate. It’s true that corporate executives often manage expectations so they can give investors a pleasant surprise instead of a nasty shock, but such low forecasts are rarely quite so widespread, suggesting there could be more to them this time around, said Ron Temple, chief market strategist at Lazard.

“It’s more likely that we are going to be disappointed than surprised on the upside,” he said.

Everyone wants to hear from the nation’s big banks.

The first group to report results happens to be the industry that investors are most eager to hear from. Major banks including JPMorgan Chase, Citigroup and Wells Fargo will post their results Friday, the first formal update for the industry since the collapse of Silicon Valley Bank last month.

Investors and analysts note that it’s likely too soon to see the full impact of March’s turmoil, given that it came so close to the end of the quarter. Instead, attention will focus on comments from the banks’ CEOs and chief financial officers about what they’ve seen more recently, and what to expect — both for the banks and for the economy.

“It’s going to be more about the commentary and tone,” Temple said.

A key question on investors’ minds will be just how many customers transferred their deposits from smaller regional lenders to the biggest lenders, and what financial steps the smaller competitors have been forced to take to stay afloat.

There are already signs that banks have retreated from lending, and that could add pressure to other companies in need of cash as the economy weakens.

“These CFOs better be prepared to get the third degree and give detail on how they are coping and how things are looking going down the road,” said Michael Kushma, chief investment officer for broad market fixed income at Morgan Stanley Investment Management.

Elsewhere, profit margins will be one detail to watch.

As inflation spiked last year, consumers were willing to pay higher prices passed on by companies facing higher costs themselves. As a result, corporate profit margins increased in 2022, to their highest level since 2008.

The Federal Reserve kept raising interest rates in the first quarter, adding to the costs for companies and consumers. But companies are finding it increasingly difficult to keep raising prices on their customers.

For companies in the S&P 500, the net profit margin, or the percentage of a company’s revenue that ends up as profit, is expected to fall to its lowest level since the end of 2020, FactSet’s data shows.

If companies can’t pass on costs as easily, they are likely to become more conservative in their decision making, pulling back from spending and potentially laying off workers, slowing the economy.

“We have lived with higher-than-normal interest rates for another three months, at a time when economic activity has slowed. What has been the effect of that?” said James Masserio, co-head of equities for the Americas at Société Générale. “That is going to be front and center for people.”

While the overarching expectation is for a decline in profitability, the outlooks for different sectors of the stock market vary widely.

Materials companies, like mining businesses and commodities manufacturers, are expected to show that their earnings have fallen by about one-third from the beginning of 2022, according to the FactSet data, as fears over a slowdown in global growth have sapped demand for an array of commodities like copper and aluminum.

Communications and technology companies are also expected to report sharp declines in earnings. At the other end of the spectrum, big oil producers like Exxon Mobil and Chevron are expected to report double-digit earnings growth for the fifth consecutive quarter, and industrial companies for the eighth straight quarter, with global demand offsetting a decline in prices.

Delta Air Lines, one of the first big companies to report earnings, reflected a mixed outlook within its own results. The company said Thursday that had fallen short of forecasts for sales and profit in the first quarter. But because of “record advance bookings for the summer,” it issued a bullish prediction for growth in the second quarter.

So far, the stock market is taking this in stride.

Despite the worsening outlook, stock prices remain buoyant. The S&P 500 has moved sideways so far in April, but has climbed 7% for the year.

To some extent, that reflects the lopsided makeup of the index, with the colossal sizes of Apple, Microsoft and a handful of others meaning gains in their share prices can prop up the index even when other companies falter.

The Russell 2000 index of smaller U.S. companies, which are more susceptible to an economic downturn, has inched lower this month, but even this index remains positive for the year.

Some analysts and bankers said many investors had spent recent months preparing for a more troubled time ahead and were already positioned for the bad news. That may help support market prices even as weak earnings reports roll in.

That’s the optimistic outlook. The counterargument is that, despite dire predictions about the economy and corporate profits last year, investors haven’t had to face a meaningful slump. The new data could change that.

“It’s a big piece of the puzzle that we are missing,” Masserio said.

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