Earnings estimates are declining for the biggest U.S. companies but that doesn’t mean the stock market will also fall, according to Bank of America Merrill Lynch. The bank said stocks are still likely to rise as long as the economy isn’t contracting.
“During prior non-recessionary quarters in which earnings per share growth was negative,” said Savita Subramanian, equity and quant strategist at BofA, “the S&P 500 was up during earnings season 60 percent of those times, with an average return of 2 percent.” The bank counted 31 times when stocks rose during the quarter while earnings fell since 1960.
“We expected the EPS recession to be transitory, with positive EPS growth resuming in the second half and a more normal run rate of EPS growth in 2016,” BofA said in an April 10 report
obtained by Newsmax Finance.
First-quarter earnings estimates for companies in the Standard & Poor’s 500 index have fallen 8 percent in the past three months to $27.04, a bigger cut than in any quarter in the past two years, according to FactSet research. Wall Street strategists on average estimate earnings will fall 4 percent for the first quarter, or 6 percent excluding the effect from stock buybacks.
BofA recommends health care stocks while avoiding stocks in the energy industry that have been battered by the crash in oil prices since last summer. The health care industry has a comparably high proportion of companies whose earnings beat Wall Street estimates, a trend that tends to persist in subsequent quarters, BofA said.
The drop in first-quarter earnings estimates “has been chiefly due to energy, here estimates have fallen about 50 percent year to date,” the bank said. “Oil will have a bigger effect on earnings this quarter.”
If investors shrug off earnings the S&P 500 may hit a record in the next week, according to technical signs studied by Avi Gilburt
, a columnist for MarketWatch.
“We have been looking at the last month as a consolidation setting us up for a strong rally toward 2,200 in the S&P 500,” he said. “If next week does not provide us with weakness in the equity market, and we take out the all-time highs, we are clearly heading much higher.”
Gilburt uses Elliott Wave analysis first developed by Ralph Nelson Elliott, an accountant who studied the wave-like movements in financial and market cycles.
“While many remain bearish due to what they expect to be bad corporate earnings in the upcoming reports, we have chosen to remain steadfastly bullish the main trend,” he said. “This year may turn out to be a ‘Buy in May’ event.”
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