Why experts warn earnings growth could slow—and its impact on stocks

Rising Oil Prices Threaten to Squeeze Corporate Profits

Key Takeaways

Analysts from JPMorgan have issued warnings that macroeconomic data suggests a potential slowdown in earnings growth later this year. The rising cost of oil is also posing a risk to profit margins. With stock multiples under pressure due to increasing inflation and bond yields, experts believe that earnings growth will be the main factor driving stock returns for the remainder of the year.

The anticipated 2026 earnings boom may not materialize as expected, according to JPMorgan. In a recent note, analysts led by Khuram Chaudry highlighted that while there are many earnings upgrades, the trend in revisions indicates that the momentum might be fading. Earnings expectations typically move in line with stock prices, but recently, earnings forecasts have increased while the S&P 500 has declined. This divergence could signal that the strong profit growth seen in the first half of the year is beginning to wane.

Two key economic indicators may point to an upcoming earnings slowdown. The gap between the Producer Price Index (PPI) and the Consumer Price Index (CPI)—which represents the difference between what businesses pay and what consumers pay—is positively linked to both sales and earnings revisions. However, this gap has narrowed in recent months. If this trend continues, it could limit further increases in both EPS and sales forecasts, according to the analysts.

Why This Is Important

Stock prices are essentially influenced by two factors: expectations about future earnings and the amount investors are willing to pay for each dollar of those earnings. As bond yields rise, the latter factor is declining, meaning that profit expectations must increase for share prices to continue rising.

Analysts are also monitoring the U.S. ISM order-to-inventories ratio, which serves as a leading indicator of profit expectations. When orders exceed inventories, it signals higher demand, and vice versa. This ratio has been declining for the past three months, reflecting the narrowing inflation spread and suggesting that the upward trend in sales and EPS revisions may soon slow down.

A slowdown in earnings growth would be detrimental to equity markets. Wall Street analysts anticipate that double-digit earnings growth will be the primary driver of stock gains through the end of the year. While they expect rising bond yields to keep a cap on multiples, they still predict that stocks could rise alongside profits. If earnings estimates decline in the coming weeks, stock prices may face a significant correction given the high expectations currently in place.

The Impact of Rising Oil Prices

Oil prices represent one of the most significant risks to earnings growth later this year. Brent crude oil futures, the global benchmark, traded above $100 a barrel for the first time since late May on Thursday, as tensions in the Middle East escalated. Iran-backed Houthi rebels in Yemen attacked two Saudi Arabian oil tankers in the Red Sea earlier this week, threatening to block traffic through the Bab al-Mandeb, a critical alternative route for seaborne Middle East oil exports.

“Investors need to be at least somewhat worried that oil and gasoline prices will both weaken consumers and the economy while also complicating life for central banks,” said Sameer Samana, senior global market strategist at the Wells Fargo Investment Institute.

Goldman Sachs analysts predicted in a recent note that oil prices will maintain their recent gains through August before dropping to around $80 a barrel, assuming de-escalation by the end of the year. However, they acknowledged that the risk of price increases is growing. They warned that sustained disruptions in the Strait of Hormuz could push prices up to $120 a barrel by the end of the year, and even higher if the Bab al-Mandeb remains disrupted.

Effects on Corporate Profit Margins

Higher oil prices threaten to squeeze corporate profit margins at the same time that they hinder revenue growth by forcing consumers to spend more on gas.

“Investors should pay close attention to corporate earnings guidance over the next several weeks, as management teams often signal rising input costs before they become evident in reported results,” said Scott Martin, a partner at Kingsview Wealth Management. He emphasized that companies with the greatest exposure to oil prices, including airlines, transportation firms, and industrial manufacturers, are the most vulnerable to an earnings reset. Businesses with thin margins or limited ability to pass on higher costs to consumers are also at risk.

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