US stocks rise on earnings season, but this summer may be different.
The next four weeks may not be a good time to buy, but rather an opportunity to "sell the news".
US stocks usually rebound during earnings season, but this summer may be different.
Nadia Lovell, Senior US Stock Analyst at UBS Global Wealth Management, suggests that the next four weeks may not be a buying opportunity, but rather a time to be cautious.
If this is the case, it would make this earnings season unusual compared to recent history.
Earnings Season Drives US Stock Market Growth
Over the past few decades, a significant portion of the annual gains in the US stock market has accumulated within the four weeks when most large companies listed in the US announce their earnings.
An analysis by Deutsche Bank found that the median quarterly increase in the S&P 500 index during the peak weeks of earnings season is around 2%. In contrast, the median increase for the remaining quarters is 1.7%.
Jim Reid from Deutsche Bank stated last Friday, "Considering that earnings season accounts for 16 weeks (30.7%) of the year, while the rest of the time accounts for 36 weeks (69.3%), this is a significant difference."
However, even Reid acknowledges that given institutional investors have shed their cautious sentiment and re-entered the stock market, US stocks have already rebounded, which may deviate from this historical pattern during this earnings season.
High Valuations in the US Stock Market
"It is more likely that the market is ahead of the fundamentals. Buyers have already factored in better company prospects, but the price-to-earnings ratio appears to be too high," said Lovell from UBS.
According to the latest comprehensive forecast by FactSet, earnings of S&P 500 index constituents are expected to decline by 7.1% in the second quarter compared to the same period last year.
If this figure remains unchanged, it would be the largest year-on-year decline since the second quarter of 2020 when the outbreak of the COVID-19 pandemic caused profits to plummet by 31.6%. It would also mark the third consecutive quarter of earnings below the previous year's level.
Meanwhile, the current estimated price-to-earnings ratio of S&P 500 index constituents is over 19 times, which is higher than the 5-year average of 18.6 times and the 10-year average of 17.4 times.
Lovell added that US stocks appear to be "overvalued," which means that companies need to exceed Wall Street's typically conservative earnings expectations by a larger margin in order to sustain their upward momentum.
Lovell believes that this dynamic may become the market's primary reaction to the earnings announcements in the coming weeks.