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- JPMorgan is super-bullish on first-quarter earnings.
- The firm's equity strategists, and others, are counting on record-breaking results to propel the market after a volatile start to the year.
JPMorgan's equity strategists are very bullish on first-quarter earnings.
In fact, they're so bullish that they expect "companies to deliver strongest growth of this cycle with room for estimates to be revised higher," according to a note on Thursday.
"We expect S&P 500 to deliver 4-5% earnings surprise with 1Q18 EPS of ~$37.50 (implying ~21% growth y/y vs. consensus estimate of 17%), despite 6% positive revision since passage of tax reform," Dubravko Lakos-Bujas, JPMorgan's chief US equity strategist, said in a note on Thursday.
"Company guidance and street estimates are likely too low with respect to actual tax benefits, weaker US Dollar (-3% q/q and -8% y/y), and higher oil (+8% q/q and +22% y/y)."
They, and strategists at other firms, are counting on the earnings season, which unofficially kicks off with JPMorgan's results on Friday, to provide a reprieve for investors that have been slammed with trade-war headlines and a slump in big tech stocks. Lakos-Bujas sees the S&P 500 ending the year at 3,000, a 12% leap from where it opened Thursday, and the median forecast of major strategists tracked by Bloomberg.
The recent sell-off of the S&P 500 has made stocks even more attractive, judging by their prices relative to the expected earnings per share. The price-to-earnings multiple based on estimates for the next 12 months is at 15x, below its historical median, Lakos-Bujas said.
JPMorgan
Also, companies are holding a record amount of cash on hand even with interest rates near all-time lows, and that makes their valuations more compelling, he said.
Lakos-Bujas forecasts that companies are set to spend a record $800 billion on share buybacks this year, which would provide more support for their stocks.
"We are expecting record buyback announcements during this earnings season given further clarity on tax reform (vs. BoY), equity multiples are broadly attractive, and companies likely replenish buyback programs after the recent sell-off," Lakos-Bujas said.
In line with their colleagues' expectations, JPMorgan's global market strategists are advising clients to stay bullish on stocks.
"The hurdle for beating the Q1 reporting season is not high, in our mind," said a team of strategists including Nikolaos Panigirtzoglou, in a separate note on Thursday.
"We, thus, retain a large equity overweight in our model portfolio hoping that the reporting season will encourage both retail and institutional investors to resume their equity buying."