Companies within the S&P 500 could report first-quarter earnings-per-share growth of 27% year over year, according to Bank of America. Growth of that magnitude would be 6% above consensus.
Strong results, however, were last quarter unable to ignite a major move in the stock market, allying concerns that a similar disappointment may be on the horizon.
S&P 500 companies that beat on both profit and sales last quarter underperformed the index by 0.1 percentage points the following day, resulting in the worst alpha for beats in history, Bank of America found. The peak of the 2000 dot-com bubble was the only time in history where there was negative alpha. Alpha is the excess return of an investment relative to the S&P 500.
"Limited rewards indicate good news being priced in, and the 5% rally since last earnings season plus building euphoric sentiment lead us to suspect that a significant earnings beat may not translate to big market gains." wrote Savita Subramanian, equity and quant strategist at Bank of America Securities.
The S&P 500 is already hovering at record levels.
The firm has a "neutral outlook" due to its belief that the rebound in cyclical stocks, vaccine, and stimulus is already priced in. The number of corporations that last quarter mentioned optimism hit the highest level since recordkeeping began in 2003.
Strategists at UBS are more optimistic that the tepid response to strong fourth-quarter earnings was just a blip on the radar.
"History would support the view that performance should be better in Q1 reporting as weak performance on beats has not lasted for 2 consecutive quarters," wrote Keith Parker, equity strategist at UBS.
His team forecast S&P 500 earnings will beat consensus estimates by more than 10% and that the strong results will outweigh supply chain concerns and rising commodity costs.
A number of industries, including chipmakers, have experienced shortages amid the COVID-19 pandemic. Others, including homebuilders, have had to deal with surging commodity costs that have occurred following the unprecedented fiscal and monetary stimulus that has been injected into the economy.
"Q1 reporting should drive the equity market higher on the back of broad and large earnings upgrades," Parker wrote, noting that trends support being overweight energy, financials, technology and consumer discretionary.
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