JPMorgan says earnings beats may be running out of market juice
A strong second-quarter reporting season has not been enough to wake up the S&P 500, with JPMorgan warning that key profit drivers may be fading.
By Frankie Delgado · News Reporter
3 min read
Wall Street companies are still clearing the earnings bar, but JPMorgan says that old market trick may no longer be enough to send stocks racing higher.
In a Thursday note cited by MarketWatch, JPMorgan strategists led by Khuram Chaudhry said earnings upgrades remain widespread, but the pattern of analyst revisions suggests the boost from stronger forecasts could be losing power.
The warning lands in the middle of a busy second-quarter earnings season. MarketWatch reported that major names including Goldman Sachs, Bank of America, Alphabet and Tesla have posted results over the past two weeks. BNY Mellon, Johnson & Johnson and ServiceNow have also raised their outlooks for the year, according to the report.
That would usually be the kind of corporate news investors love. JPMorgan’s point is that the setup around earnings is getting less friendly.
The bank’s strategists said the war in Iran has altered inflation conditions and has fed into expectations for both short-term and long-term interest rates, according to MarketWatch. That matters because higher or stickier inflation can complicate the path for rates, which investors use to price stocks.
JPMorgan also flagged a key inflation relationship: the gap between producer-price inflation and consumer-price inflation. According to the bank, that spread appears to have topped out and is now stalling.
The strategists said that relationship matters for corporate numbers because sales generally have a 47% correlation with the spread, while earnings per share usually have a 29% correlation with it, MarketWatch reported. If the trend keeps fading, JPMorgan said additional gains in sales and earnings-per-share forecasts could be harder to come by.
Another warning light, according to JPMorgan, is coming from the U.S. Institute for Supply Management’s orders-to-inventories ratio. The bank said that gauge has slipped over the past three months, adding to the risk that sales and earnings estimates may have less room to rise.
The strategists also pointed to a change in so-called high-dispersion stocks, meaning companies where analysts’ earnings-per-share forecasts vary widely between the most optimistic and most pessimistic estimates.
JPMorgan said those stocks appear to have peaked after strong gains over the past couple of years and are beginning to give some of those gains back, according to MarketWatch. The bank said a similar case can be made for higher-risk stocks compared with steadier companies with lower leverage.
The market has not exactly fallen apart. MarketWatch reported that the S&P 500 finished Wednesday a little more than 1% below a record high. The index, however, has been roughly flat for the month.
For investors, JPMorgan’s message is sharp: better-than-expected earnings and raised guidance are still good news, but they may not be enough on their own if inflation signals, order trends and risk appetite are all cooling at the same time.
This story draws on original reporting from MarketWatch.