Earnings look good, but use stock bounces to trim positions - J.P. Morgan's Kolanovic
TERADAT SANTIVIVUT
U.S. earnings should show a lot of beats on consensus but investors should still be underweight equities in the region, according to the J.P. Morgan Global Markets Strategy team.
"Looking at Q1 reporting season, the consensus expectations have come down aggressively over the past months, from +7% yoy for S&P500 (SP500) (NYSEARCA:SPY) (NYSEARCA:VOO) (NYSEARCA:IVV), to current -7%," strategist Marko Kolanovic wrote. "In contrast, activity in most places was better in Q1 vs the previous quarter."
"The combination of low hurdle rate and the improving fundamentals bodes well for the corporate results, where we expect beats," Kolanovic said. "We advise to use any strength on the back of positive Q1 results as a good level to reduce from."
Earnings from major names roll in today, with Microsoft (NASDAQ:MSFT) and Alphabet (GOOG) (GOOGL) posting after the bell.
Stocks have benefited from a recent decline in volatility, Kolanovic added.
"The VIX (VIX) recently reached 16, and 1M S&P 500 realized volatility fell to 9%, for the first time since 2021," he said. "This is unusually low given the increase of interest rates, tightening of financial conditions, level of macro risks, and elevated geopolitical tensions."
"We believe the reasons for low volatility are technical in nature with the market dominated by option sellers," Kolanovic said. "Selling of options forces intraday reversion, leaving the market price virtually unchanged many days. This in turn drives buying of stocks by funds that mechanically increase exposure when volatility declines (e.g. volatility targeting and risk parity funds). This market dynamic artificially suppresses perceptions of macro fundamental risk."
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