Quarterly earnings will crush expectations after biggest forecast cut since 2008, Bank of America says

• Bank of America analysts expect S&P 500 companies to beat earnings expectations by 8% in the second quarter after massive forecast cuts.
• Wall Street lowered profit expectations by roughly 40% heading into second-quarter earnings season, its biggest cut since 2008.
• The muted projections, along with recent economic data surprises and positive early reporters, set up companies to surprise to the upside, Bank of America said Monday.
• Healthcare and consumer staples stocks are best positioned to trounce Street expectations once earnings season starts next week, the firm added.

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Second-quarter earnings are set to show the brunt of the coronavirus' fallout yet still overcome analysts' expectations, Bank of America said Monday.

Wall Street sees profits sliding 44% year-over-year in the second quarter, reflecting the pandemic's sudden halt to consumer spending and economic activity. Bank of America holds a decidedly more optimistic view. The firm expects earnings to fall 39% from the year-ago period, reflecting an 8% beat to the industry's consensus.

Much of the bank's positive outlook hinges on slashed expectations. Analysts have cut their quarterly forecasts by roughly 40% heading into earnings season, marking Wall Street's largest cut since 2008. The modest predictions set companies up to surprise investors when they begin reporting quarterly figures next week, Bank of America's analysts said in a note.

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Companies reporting earnings early in the season already previewed a strong beat. Of the 16 early reporters, half beat both sales and profit expectations. Historically, roughly 46% of companies reporting early trounce both estimates. While the firms are concentrated in the tech, consumer, and industrials sectors, Bank of America found an 82% correlation between early reporter beats and S&P 500 performance since it began tracking the data in 2012.

Recent weeks' economic data releases also forecast an optimistic earnings season. Positive data surprises have increased to their highest level since early 2018, the firm wrote, with strong retail sales and job creation fueling hopes for a V-shaped rebound. The Institute for Supply Management's manufacturing and non-manufacturing gauges — two of the indicators most correlated with S&P 500 earnings — point to a year-over-year profit slump in line with Bank of America's projection, the analysts added.

For investors looking to profit from a better-than-expected earnings season, the firm highlighted the consumer staples and healthcare sectors as best positioned to surprise to the upside. Financials and information technology stocks followed, while consumer discretionary and utilities companies were tied as the weakest sectors.

Active investors should also benefit. The season's busiest reporting days will likely see the strongest performance dispersion between individual names and major indexes, Bank of America said.

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