JPM: Few Stocks Out There Look Attractive In This Market

The third quarter earnings season got off to a damp start earlier this week when aluminum giant Alcoa (AA) reported third-quarter results that missed Wall Street expectations.

It’s widely believed that Alcoa’s flop has set the scene for the rest of the earnings season. A report out from a JP Morgan earlier this week highlighted the fact that consensus earnings projections for the third quarter have come down sharply since the beginning of the year. Coming into 2016, Wall Street analysts were expecting near 10% year-on-year earnings growth for the third quarter in both the US and Europe. Now the consensus is suggesting a -1% growth in the year-on-year earnings for the US and -2% for Europe.

But never fear, JP Morgan’s equity strategists expect “corporates are likely to deliver their, by now typical, “beats” of heavily managed and reduced estimates” for the third quarter. Although the analysts caution that these “positive surprises” are unlikely to lead to upgrades to earnings per share projections for the upcoming quarters.

Heading into 2017 JP Morgan’s equity analysts are even more pessimistic. The team warns that current consensus estimates of 12% to 13% earnings per share growth for the next year would require, “a significant pickup in global activity momentum to have any chance of realization. Profit margins are likely to keep decelerating, and with P/E multiples near the top of their recent range, this would be a constraint.”

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Few stocks out there look attractive in this market

The one area of the market JP Morgan’s analysts like is Energy. They believe that Energy is the one industry where there is room for positive surprises as the sector has been subject to so much negative sentiment in recent months. Specifically the team write, “we believe that Energy offers a better risk-reward into the reporting season, as earnings will likely improve sequentially and valuations remain attractive.”

Outside of the energy sector, there’s not much JP Morgan’s equity strategy team likes. They claim interest rates will be the driving force behind equity returns over the next year or so and while cyclicals may have historically provided a good hedge against rising yields, this time around cyclical sectors “might be ahead of themselves” as the group has already “rallied more in the last three months than during the past two bond selloff episodes, while yields have so far moved by much less.”

When it comes to Defensives, the equity research team believes recent sell-off is creating opportunities, with Utilities and Pharma looking increasingly attractive. Meanwhile, Insurance looks to be an attractive hedge against another leg up in yields. JP Morgan’s analysts prefer the Insurance sector over Banks as a yield hedge as the sector “does not come with as many structural problems as Banks.”

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