Corporate America is facing its bleakest first-quarter since the pandemic started— S&P 500 companies' earnings could drop as much as 7%, new data says

• Earnings season kicks off this week with financial sector giants set to report their results.
• S&P 500 companies are expected to post a 7% decline in first-quarter earnings, per FactSet.

Corporate America may be heading into a tough earnings season, which kicks off this week.

Companies on the S&P 500 — an index that tracks a broad range of sectors such as banks, manufacturing, tech, and retail — are expected to post a 6.8% decline in first-quarter earnings from a year ago, John Butters, a senior earnings analyst at FactSet wrote in a report last Thursday.

The projected decline will be the largest since the outbreak of the COVID-19 pandemic, when companies reported a 32% slump in earnings in the second quarter of 2020, according to the financial data company.

The estimated 6.8% decline in first-quarter earnings is not just the lowest in two years, but also below the five-year earnings growth rate of 13.4% and the 10-year earnings growth rate of 8.7%, per FactSet.

"Analysts and companies have been more pessimistic in their earnings outlooks for the first quarter compared to historical average," Butters added in his note.

FactSet's analysis was based on 106 S&P companies that issued guidance on their first-quarter earnings per share.

Out of the 11 sectors on the S&P, six are expecting to report an on-year decline in earnings. Leading losses are companies in the materials, healthcare, IT, and communication sectors services. Consumer discretionary and industrials are expected to lead those reporting on-year earnings growth.

Despite the banking crisis last month, the financials sector expects the highest on-year revenue growth rate of 9% among all 11 sectors, FactSet's analysis show. However, few companies in the sector issue quarterly earnings guidance, Butters noted.

Somber tidings ahead, analysts warn.

This earnings season comes amid ongoing concerns over the economy after the Federal Reserve issued its ninth straight interest rate hike last month in its continued drive to cool inflation — intensifying worries that the economy could cool so much that it could tip into a recession, particularly amid the bank crisis.

FactSet isn't the only one warnings of somber tidings ahead of earnings releases.

Goldman Sachs strategists are also forecasting a dismal earnings season as they too expect corporate profits to see their sharpest decline since 2020, according to a note last week seen by Insider. Goldman analysts expect earnings per share in the first quarter of 2023 to decline 7% from a year ago.

"Earnings growth peaked in most regions in early 2022 and has trended lower since," wrote Andrew Pease, global head of investment strategy at Russell Investments, an investment firm, in a March 20 report about the global outlook. "This has in part been due to moderating sales growth as economic growth cools, but falling margins have also played a role."

Profit margins are getting squeezed because the growth of labor costs, such as wages, is declining more gradually as compared to overall inflation, he added.

The S&P 500 index closed 0.1% higher at 4,109.11 on Monday. It's up 7% so far this year.

Financial sector giants Citigroup and JPMorgan will report their results on April 14. Tech giant Apple is scheduled to report quarterly earnings on May 4, while Microsoft will report on April 25.