Photo: JP Morgan
JP Morgan equity strategists Mislav Matejka and Emmanuel Cau say investors are in for a “reality check.”
The second quarter earnings season, which unofficially kicks off today with Alcoa’s quarterly results set to hit the tape after the closing bell this afternoon, could bring some bad news for those with high hopes for stocks.
In a note to clients today, the JP Morgan strategists write that the pre-announcements, wherein companies release updated earnings forecasts ahead of releases of their official quarterly results, reflect a particularly negative outlook:
So far, the pre-reporting season has been particularly poor in the US. Negative to positive pre-announcements ratio stands at 3.62x, the highest level in three years.
We pointed out in the past that a high N/P pre-announcement ratio is not necessarily an impediment to positive market performance during the reporting season. However, we are concerned that US equities were overly resilient into the current reporting season. Typically the market tended first to reprice lower to reflect weaker earnings delivery during the pre-reporting season before rebounding later, when the actual earnings come out.
The chart above shows that the negative to positive pre-announcements ratio at three-year highs, driven mainly by recent company revisions of their own earnings forecasts occurring so far in 2012.
JP Morgan says this is because the macro picture “clearly weakened in Q2 vs Q1 in most places.”