JPMorgan Is Bullish on U.S. Earnings Growth Driving Equity Gains

(Bloomberg) -- JPMorgan Chase & Co. is bullish on U.S. corporate profits.

The firm expects earnings to exceed consensus estimates by 4 percent to 5 percent this season, even after those forecasts were raised 6 percent following the passage of tax cuts. The firm has already said it sees upside for U.S. stocks in this reporting period due to factors such as the tax overhaul, a pickup in deal activity and support from buybacks.

“Company guidance and Street estimates are likely too low with respect to actual tax benefits, weaker U.S. dollar and higher oil,” JPMorgan strategists including Dubravko Lakos-Bujas and Marko Kolanovic wrote in a note Thursday.

JPMorgan says valuations on the S&P 500 are below their historical median based on forward consensus earnings-per-share estimates. They also say that companies’ record cash holdings in a low-rate environment are supportive of stocks. U.S. corporate earnings have beat consensus estimates by an average of 3.1 percent over the past five years, according to data compiled by Bloomberg.

JPMorgan Is Bullish on U.S. Earnings Growth Driving Equity Gains

Net-income margins could reach a record 13 percent on the lower effective tax rates, the note said, adding that “the Street has underappreciated the margin potential historically.”

JPMorgan Is Bullish on U.S. Earnings Growth Driving Equity Gains

Also, if new risks such as further escalation in Middle East tensions or a ramped-up U.S.-China trade spat don’t emerge, a shift in focus back to fundamentals should help bring realized volatility down from its current levels and drive systematic buying, the report said.

Lakos-Bujas has a year-end price target on the S&P 500 Index of 3,000, which would be a gain of about 14 percent from current levels. And he isn’t pushing the envelope -- that’s the median of strategist projections compiled by Bloomberg.

This earnings season should bring the “strongest growth of this cycle with room for estimates to be revised higher,” the strategists said.

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