JPMorgan: Earnings Recovery is Seeing Increasing Confirmation

« Value, Banks and Autos EPS are the most leveraged here »…

Summary of the note published Jan 9:

« With equity P/E multiples hovering at 10-year highs and against the backdrop of rising bond yields, it is crucial that earnings start turning higher. Indeed, the mini earnings recession that lasted for four quarters appears to have ended in Q3 ’16. The upcoming reporting season is poised to deliver outright positive yoy EPS growth. The supports for earnings are: stronger activity levels and higher commodity prices – driving top line improvement, as well as the signs of a pickup in corporate pricing power – which should offset building wage pressures. The latest ISM prices paid subcomponent is at 65, which is the highest since 2010. If corporates can start passing through higher input costs, then they should be able to protect their margins better. Consensus stands at a 5-7% yoy EPS growth rate for US and Eurozone in Q4, which could prove to be too conservative. Relatively, weaker euro and yen help Eurozone and Japan, but stronger USD is a drag for the US. For Eurozone, in particular, a number of variables are aligning for stronger earnings delivery, which would be a welcome change after all the years of disappointments. The latest composite PMI at 54.4 is consistent with EPS revisions staying in +ve territory. Where to expect stronger EPS recovery? Value, Financials and Cyclicals should see the biggest improvement. Historically the most leveraged sectors to PMIs were Banks and Autos. Banks’ EPS revisions have beaten the overall market for six weeks now, the longest spell since Sept ‘15. We find these Value groups remain fundamentally attractively priced, but a turn in earnings would help drive the next leg of outperformance. »

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