JP Morgan sees an earnings rebound lifting US equities

Added 19th May 2015

JP Morgan sees an earnings rebound lifting US equities

Investors should, however, lower their return expectations to single-digits for the S&P 500 index, the firm said. 

The index has recently been hitting all time highs:


“We continue to favour US equities, despite slightly higher valuation levels. The base case for the S&P 500 total return in 2015 is in the single-digit range, which we believe is still attractive for most portfolios in this market environment.”

Low oil prices and a stronger US dollar, not the broader economy, are what weighed on the first quarter earnings of companies listed on the S&P 500 index, the firm said. 

The firm expects the drag on earnings to subside by the end of the year. 

“Bottom-up estimates imply that earnings will stabilise by the third quarter and rebound by the fourth. Analysts are already looking through these short-term factors (falling oil price and rising dollar) toward future earnings growth.

“Earnings per share growth is expected to be less negative in the second quarter, slightly positive in the third quarter and rebound in the fourth quarter as these macro headwinds stabilise and earnings rebound from the prior year.

“For full-year 2015, the S&P 500 EPS is expected to grow by 2.9% to a level of $116.”

Investment ideas

The firm continues to favour large-cap companies and is not shying away from dollar-sensitive stocks. 

“The dollar may strengthen further for a number of reasons, including a move by the Federal Reserve to increase interest rates. However, there are numerous other factors that still favour large-caps and dollar-sensitive stocks.

“These include stronger growth in regions such as Europe, lower overall volatility and lower valuation levels for large-cap stocks than mid- and small-caps.”

Investors should also focus on favorable long-term sector themes. For example, consumer discretionary stocks, which the firm said should continue to benefit from improving consumer net worth, lower oil prices, attractive EPS growth trends and favourable valuation levels. 

Information technology is also attractive with a valuation level that is below its long-run average, the firm added. 

In the energy sector, only about 18% of stocks are cheap relative to their own historical valuations. 

First quarter review

The firm estimates a 5% year-on-year decline in the first quarter EPS of S&P 500 companies to $25.94. The figures are based on the results reported so far, which covered 92% of the market capitalisation.

The earnings season has been "extremely weak", the firm said, adding that the first quarter will be the first time since 2012 that EPS declined in two consecutive quarters.

Excluding the energy sector, the EPS of companies listed on the S&P 500 grew by 9.1%, in-line with historical trends. 

The rising dollar resulted in an average EPS decline of 5% for most multinational non-energy companies, the firm added.

The top performing US equity funds available for sale in Singapore and/or Hong Kong:

 Source: FE. Funds with a minimum three-year track record

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