Don’t be fooled by the strong earnings season as a credit squeeze is set to hit companies’ profits, Wharton professor Jeremy Siegel says

• Don’t be fooled by the buoyant trend so far in the current earnings season, according to Wharton professor Jeremy Siegel.

• That’s because the effects of an ongoing credit crunch are yet to show up in companies’ earnings data, according to him.

• Siegel said the Fed should therefore pause its interest-rate hikes, but doesn’t think policymakers will do so unless economic data worsens.

Don’t be fooled by the buoyant trend so far in the ongoing earnings season, because an emerging credit squeeze is set to hit companies’ profits, according to Wharton professor Jeremy Siegel.

S&P 500 firms have kicked off the current earnings season on solid footing – the best in over a decade – despite fears that last month’s banking tremors will lead to a credit crunch that eats away at corporate profits.

But according to Siegel, the good first-quarter results aren’t that surprising given Silicon Valley Bank’s collapse and the ensuing banking turmoil came toward the end of the January-March period.

“We’re not getting in these earnings what effect the slowdown in lending really might impact the earnings,” Siegel told CNBC on Tuesday.

Fears of a credit contraction resulting from the banking instability appear to have taken firm root, with Morgan Stanley saying the squeeze has already begun. The latest data shows a steep drop in lending as financial institutions scramble to offset a deposit run, according to strategists at the US bank.

That makes it more difficult for American companies to access loans, which threatens to undermine their business operations and earnings.

“The impact is there, it’s just not in the data yet,” Siegel said of first-quarter financial results.

Given the tighter credit conditions, Siegel said it’s time for the Federal Reserve to pause its aggressive interest-rate hike campaign, but added he doesn’t think the central bank will pivot unless they see deteriorated data.

He noted that inflation is firmly on a downward trajectory toward the Fed’s target of 2%, another reason why the Fed should end its rate hikes. The annual rate of US consumer-price increases fell to 5% in March from a 40-year high of 9.1% reached last summer.

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