JPMorgan said on Monday that most investors are already braced for disappointments when it comes to earnings season.
The general sentiment is that the upcoming reporting season will be challenging, JPM said in a note, given the combination of the activity slowdown, significant supply distortions and the energy price acceleration.
“PMIs in Q3 are sequentially weaker, but the good news is that consensus earnings per share growth projections have taken a step lower versus the prior quarter, too. Analysts didn’t follow through on Q2 positive surprises, which offers a cushion,” it said.
“Notably, weekly EPS revisions have just turned negative in the US, for the first time since last summer, concentrated in cyclical sectors – materials, industrials, financials and discretionary – which is consistent with the slowing in economic activity, and suggests analysts have already been reacting to the demand shortfall.”
JPM said it remains bullish on energy and banks stocks. “Overall, most of the time commodity prices tended to be positively correlated to earnings, apart from the occasions when volume slowdown dominated, such as was the case in 2008,” it said.
JPM said the positive correlation between commodities and market earnings will not break down, as some of the big headwinds are continuing to ease.
“Finally, we note that there is no forward looking information in the current levels of EPS revisions, i.e. one should not be selling stocks just because EPS revisions have decelerated recently, and would advise to use any earnings generated weakness to add into.”
