The stock market needs better earnings to keep climbing. It’s not going to get them, warns JPMorgan

Earnings can be a treatment for the latter. Handily, we are entering the busier part of the corporate reporting season. Wobbly bulls will want to see numbers and forecasts that make them feel their footing is secure.

“The good news is that the hurdle rate has come down aggressively,” says Mislav Matejka and the equity strategy team at JPMorgan.

The projections for fourth quarter S&P 500
SPX
aggregate earnings per share are $4 lower than achieved in the third quarter, with the year-on-year growth rate declining from 10% to only 2%, according to the JPMorgan team in a note dated Sunday.

“Given this, the actual results are likely to yet again beat the much lowered estimates,” says Matejka.

But, he adds, there’s a problem. For the market to advance further, it will require more than just earnings beats from these lower levels. It will need net earnings upgrades.

Why? Because in Matejka’s view investor sentiment is too complacent, with positioning at much higher proportions than seen through last year, and valuation multiples having rerated higher, from a price/earnings ratio of 17.5 for the S&P 500 over the past year to the current 20.

Meanwhile the key driver of last quarter’s rally, the decline in bond yields, is probably over for the time being.

Worryingly, early reporting has shown that earnings beats already are not being rewarded by a better stock performance — indeed, so far the average stock that has topped forecasts has lost 1% on the day, Matejka notes.

And, crucially, JPMorgan thinks the downtrend in earnings momentum is not changing as purchasing managers’ surveys show waning activity, the jobs market may weaken and companies thus struggle to maintain profit margins that are elevated.

This issue is even more problematic in Europe where “profit margins are elevated vs. typical, higher than what was the case pre-COVID for nearly 75% of them,” says Matejka.

“COVID distortions appear to have benefited cyclicals more
than the defensives, and this is where the unwind could happen,” says Matejka.

Consequently, he believes defensives will perform better in 2024. And he stay’s overweight growth versus value, preferring the U.S. to the eurozone.

But a big driver of the U.S. market of late may struggle. “Semiconductor stocks have rallied strongly over the last year, breaking away from key fundamental drivers. This gap might start closing.”

Markets

U.S. stock-index futures
ES00,
+0.31%

YM00,
+0.15%

NQ00,
+0.57%
are higher as benchmark Treasury yields
BX:TMUBMUSD10Y
fall. The dollar
DXY
is little changed, while oil prices
CL.1,
+0.42%
are a fraction firmer and gold
GC00,
-0.08%
trades around $2,020 an ounce.

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The buzz

Seventy-nine of the S&P 500 are due to reveal their results this week, but it gets off to a slow start on Monday. Companies reporting earnings after the closing bell include Logitech International
LOGI,
-0.05%,
United Airlines
UAL,
-2.39%,
and Zions Bancorp
ZION,
+2.71%.

The U.S. economic leading indicators report for December will be released at 10 a.m. Eastern.

Archer Daniels Midland shares
ADM,
-0.80%
are down more than 9% in premarket trade after the agribusiness giant said its chief financial officer has been placed under administrative leave, amid an investigation into accounting practices in its nutrition segment.

Macy’s Inc.
M,
-1.67%
rejected an unsolicited bid by Arkhouse Management and Brigade Capital Management to take the department-store chain private in a $5.8 billion deal.

Ron DeSantis bows out of presidential race, endorses Trump, misquotes Churchill.

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The chart

The world’s two biggest economies have had widely divergent stock markets of late. The chart below from Deutsche Bank strategist Jim Reid shows just how much, using the total returns of the Nasdaq 100
NDX
and Hong Kong’s Hang Seng
HK:HSI
in U.S. dollars and rebased to 1985.

Reid poses the question: “Which would you rather own for the next 5-10 years (or beyond) if you had to choose between the two for your pension?”

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

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