Corporate America is facing its sharpest drop in profits since the early stages of the Covid pandemic, according to Wall Street forecasts, as high inflation squeezes margins and fears of an impending recession hold back demand.

Companies on the S&P 500 index are expected to report a 6.8 per cent decline in first-quarter earnings compared with the same period a year earlier, according to analyst estimates compiled by FactSet. That would be the biggest fall since the more than 30 per cent plunge in the second quarter of 2020, which came as the rapid spread of coronavirus led to a widespread economic shutdown.

Ahead of the first-quarter earnings season, which begins with a trio of big banks reporting results on Friday, sectors such as energy and consumer discretionary are expected to show strong year-over-year profit growth. However, a combination of flagging consumer demand, tighter credit conditions, and a downswing in commodity prices has cut into earnings expectations across a broad spectrum of industries.