Don't expect an optimistic corporate earnings season to drive the US stock market higher.
The Zhitong Finance App learned that J.P. Morgan strategists warned not to expect an optimistic corporate earnings season to drive the US stock market higher, because most of the optimism has already been digested after this year's record rise.
The J.P. Morgan Chase research team led by Mislav Matejka said that profit expectations for the first quarter have been lowered, which lowered the threshold for US companies to exceed expectations. Strategists said that after excluding tech giants, the profits of S&P 500 companies are expected to decline across the board.
At the same time, investor positions seemed “very tight,” Matejka said. The US benchmark index rose to a record high due to optimism about the resilience of the US economy and falling interest rates.
“The stock market has performed well, which shows that investors are more optimistic than the pessimistic profit predictions conveyed by sell-side analysts,” he said. “We need to see a significant acceleration in earnings to justify current stock valuations, and we are concerned that this may not happen.”
Profit expectations for S&P 500 companies are declining
Matejka said that half of the US companies that have announced results so far have performed worse than the market on the day they were announced.
Despite the S&P 500 rising 10% in the first quarter, the J.P. Morgan stock strategist is still one of the more pessimistic people on Wall Street. The increase in US stocks declined slightly after higher-than-expected inflation data reduced the possibility that the Federal Reserve would cut interest rates. After Iran's unprecedented attack on Israel, geopolitical tension intensified and increased market turmoil.
Matejka said that the stock market underestimated the impact of rising price pressure on the Federal Reserve's policy and bond yields.
“While some of the changes in yield may be due to optimistic growth prospects, we think most are driven by sticky inflation,” he said. “The risk that interest rates have soared due to the 'wrong cause', a complete reversal of the Federal Reserve's policy focus, and continued overheating of inflation are all rising.”
Morgan Stanley strategist Michael Wilson also warned about the impact of higher interest rates on stock valuations. He expects the stock market to be more sensitive to interest rates as the US 10-year Treasury yield soars above 4.4%.
“On the face of it, valuation dispersion is rising as the market becomes more picky about quality and profitability,” Wilson said. “The stock market's reaction during the earnings season may show how risky the valuation is.”
Not everyone is so pessimistic. Société Générale strategist Manish Kabra predicts that a strong earnings season will continue to drive the US stock market upward. He said last week that although rising US bond yields may adversely affect the S&P 500 index, “long-term stabilization of the Federal Reserve's interest rate should curb yields.”