Investors Shouldn’t Bank on Strong Earnings Juicing Further Stock Gains, JPMorgan Strategists Say
As companies gear up to report their first-quarter earnings, investors may not see their stocks soar on positive results, according to JPMorgan strategists. Despite expectations of strong earnings, the strategists caution that stock market gains are not guaranteed, especially given the current stretched market conditions.
Consensus forecasts for corporate earnings have declined over the past few months, with S&P 500 earnings per share dropping for the fifth consecutive quarter, excluding mega-cap tech companies. While this may suggest robust earnings ahead, JPMorgan’s strategists, led by Mislav Matejka, believe that much of the market’s optimism has already been factored into stock prices.
“Equities have already had a good run into the results, suggesting that investors are more optimistic than the downbeat earnings projections by sell-side analysts convey,” Matejka stated. Additionally, there is a noticeable disparity this year between expectations for Federal Reserve policy and where stock indexes are currently trading.
Despite the positive outlook for earnings, half of the US companies that have reported so far have fallen short of expectations, according to Matejka. The strategists emphasize that the recent equity performance has been largely driven by multiple expansion, and there needs to be a clear earnings acceleration to justify current equity valuations.
The strategists also warn of overconfidence in the economic and market outlook, with implied recession odds at record lows. They believe that investors are banking on a “Goldilocks” scenario of a strong economy with accommodative central banks, while ignoring potential risks such as rising interest rates and persistent inflation.
JPMorgan CEO Jamie Dimon echoed these concerns, noting that inflationary pressures persist and the market has yet to fully feel the impact of the historic monetary tightening by the Fed and other central banks. As investors await the upcoming earnings season, it remains to be seen whether strong earnings will be enough to drive further stock gains in the current market environment.
