Some Wall Street analysts believe that US companies need to achieve a bumper harvest in the upcoming earnings season in order for US stocks to continue their current record-breaking rally.
Some wall street strategists believe that US companies need to achieve a great harvest in the upcoming earnings season in order for the US stock market to continue its record-breaking rally.
A Citigroup index shows that analysts are more likely to raise profit expectations than cut them in the second quarter earnings season. At the same time, data compiled by Bloomberg shows that expectations for 12-month forward returns have reached historic highs.
Citigroup strategist Scott Chronert wrote in a report: "Given the high implied growth expectations, the market may need to see both strong execution drivers along with rising earnings to maintain recent gains or push higher." Worryingly, although fundamental trends are positive and consensus expectations can be met, valuations suggest buyers will demand more.
JPMorgan will announce its second quarter earnings on 12 July. Since its low point in October last year, the S&P 500 index has rebounded by about 35% and has set more than 30 historical highs this year, driven by the artificial intelligence craze and bets on Fed rate cuts.
However, this has made valuations more expensive, with the benchmark index's pe ratio approaching 22, while the long-term average pe ratio is 16.
Investors' reaction to first-quarter earnings was also tepid. According to data compiled by Bloomberg, more than 80% of S&P 500 index companies exceeded expectations, but the median stock underperformed the index by 12% on the day of earnings release.
Goldman Sachs strategist David Kostin said in a recent report that this trend may be repeated in the second quarter. His team estimates that profit growth expectations have reached their highest level in nearly three years and investor sentiment is also at a high level.
Kostin said: "Therefore, although not as extreme as in the first quarter, the above-expectation return on investment this quarter should also be lower than the average level."
However, John Stoltzfus, a strategist at Oppenheimer Asset Management, said that strong profit prospects and resilient economies could support higher valuations. Stoltzfus raised his year-end target for the S&P 500 index to 5900 points, ranking second among strategists tracked by Bloomberg. His forecast implies a further 6% rise on the current basis.
Edited by Jeffrey