Don’t bet on earnings season to push stocks much higher, JPMorgan says

• Investors shouldn’t bank on strong earnings juicing further stock gains, JPMorgan strategists say. 
• Prices are already stretched, and there’s a notable gap this year between Fed policy and where stocks are trading. 
• Investors’ overconfidence in the economic and market outlook is a risk to market performance.

Companies are about to ring in a brand new earnings season, but JPMorgan says investors are unlikely to see their stocks ride higher on rosy results for the first quarter. 

Various indicators point at strong earnings on deck from US companies, but earnings beats don’t guarantee stock market gains, especially given the stretched market conditions, JPMorgan’s strategists led by Mislav Matejka said in a note on Monday. 

Breaking it down, consensus forecasts on Wall Street for corporate earnings have taken a significant dip over the past few months, with S&P 500 earnings per share, excluding mega-cap tech, outright declining for the fifth quarter in a row, according to the note. 

Such lowered expectations, as well as a boost in stock momentum over the past three months, should signal robust earnings ahead, but the strategists argue it won’t translate into a big leg up for stocks as much of the market’s unbridled optimism has already been baked into 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 said, adding that there’s a notable gap this year between expectations for Federal Reserve policy and where indexes are trading. 

Meanwhile, half of the US companies that have reported so far have lagged expectations, Matejka noted. 

“Most of the equity performance this year, and in the last 18 months, was driven by multiple expansion. We need to see clear earnings acceleration in order to justify current equity valuations, which we fear might not come through,” he said. 

They note that there’s too much complacency in the economic and market outlook, with implied recession odds at record lows. 

“Investors appear to be focused on the Goldilocks set-up, of a no-landing scenario for the economy, while central banks stay accommodative,” the note said. The strategists added that they believe the stock market so far is ignoring the Fed’s high-for-longer policy outlook, given four consecutive months of hotter-than-expected consumer price index reports.

“While some of the move in yields was likely due to more the optimistic growth outlook, we believe most of it was driven by sticky inflation,” Matejka said. “The risks of interest rates spiking for the ‘wrong reasons’, the Fed pivot getting fully reversed and inflation staying too hot are all elevated.”

The bank’s own earnings surpassed Wall Street’s estimates, but CEO Jamie Dimon warned that inflationary pressures persist, and the market has only just begun to feel the effect of the historic monetary tightening undertaken by the Fed and other global central banks.