JPMorgan Chase & Co. strategists say don’t expect an upbeat corporate earnings season to drive stocks higher because much of the optimism has already been priced in after this year’s record gains.
A research team led by Mislav Matejka wrote in a report that profit expectations for the first quarter have been lowered during the reporting period, which lowers the threshold for U.S. companies to exceed expectations. Strategists said that after excluding technology giants, S&P 500 companies’ profits are expected to decline across the board.
At the same time, investor positions look “very stretched,” Matejka said, with major stock indexes hitting record highs on optimism about economic growth and interest rate cuts.
He said: “The stock market has performed well post-earnings, suggesting investors are more optimistic than the pessimistic earnings forecasts conveyed by sell-side analysts. We need to see significant earnings acceleration to justify current stock valuations “It’s reasonable and we’re concerned that this may not happen.”
Matejka said that so far, half of U.S. companies have performed below market expectations on the day of earnings reports.
Despite a 10% gain in the first quarter for the S&P 500, JPMorgan‘s equity strategists remain among the more pessimistic voices on Wall Street. The dollar’s gains eased slightly after higher-than-expected inflation data reduced the chances of a rate cut from the Federal Reserve. Rising geopolitical tensions following Iran’s unprecedented attack on Israel also added to market turmoil.
Matejka said the stock market underestimated the impact of rising price pressures on central bank policy and bond yields.
“While some of the move in yields may be due to the optimistic growth outlook, we believe much of it is driven by sticky inflation,” the strategist wrote. “Spiking interest rates for the ‘wrong reasons,’ a complete reversal of the Fed’s policy focus, and The risks of continued overheating of inflation are rising.”
Morgan Stanley (86.19, 0.00, 0.00%) (MS.N) strategist Michael Wilson also warned about the impact of rising interest rates on stock valuations. He expects stocks to show greater sensitivity to interest rates as the U.S. 10-year Treasury yield surges above 4.4%.
Wilson said: “On the surface, valuation dispersion is rising as the market becomes more critical of quality and profitability. The reaction of the stock market during the earnings season may show how risky the valuation is.”
Not everyone is so pessimistic. Societe Generale (5.53, 0.00, 0.00%) bank strategist Manish Kabra predicts that a strong earnings season will continue to drive U.S. stock markets higher. He said last week that while rising Treasury yields could be a headwind for the S&P 500, “the long-term stability of Fed rates will limit any rise in yields.”
