One Man’s Opinion: Will First-Quarter Earnings Be Weak Again?

ManThe S&P 500 is pretty close to the year end price target set by JP Morgan, said Steven Rees, Global Head of Equity Strategy at JP Morgan Private Bank. JP Morgan is advising clients to add some protection and to sell some of their exposures, and watch out for dividend strategies.

Since the Fed is going to be hiking slower than expected, dividend strategies can still work now. Investors should look at sectors that have lagged such as consumer discretionary, and consider opportunities outside of the US in places like Europe and Japan, which have actually pulled back more than the US, he noted.

Asked how investors could add protection to their portfolios, Steve said investors could buy some short-term puts as the markets could go down by 5-6 percent from here. JP Morgan doesn’t believe the US would fall into a recession and have been buying in the dips quite aggressively through January and February. Markets are currently valued at 16-½ times earnings and JPM believes that valuation is fair.

There are, however, enough things to worry about; first-quarter earnings are going to look tough, oil prices are volatile and US elections are due while interest rates are negative in Europe and Japan, he explained.

The Federal Reserve basically met market expectations by not raising rates this week, said Jim Cahn, chief investment officer at Wealth Enhancement Group (WEG). By taking two interest rate hikes off the table for the rest of the year, the Fed relieved a little bit of market panic about what happens with the rates.

That said, WEG thinks US equities look relatively fairly priced and still thinks value looks attractive given the long-term underperformance of financials and the continued rally of energy.

It would really not be an industrial recession globally, particularly if investors look at inventory build-up and manufacturing in general, and WEG believes there’s opportunity to make money in value because of manufacturing.

Internationally, emerging markets in particular as well as developed markets including Europe and Japan, look more attractive than the US. Especially emerging markets as the story doesn’t get much worse than it is right now and generally that’s a good time to buy.

Valuations currently are similar to where they were back in 2002-2003; after that period of time prices surged between 400-600 percent depending upon the market. WEG doesn’t think emerging markets are going to go up 400-600 percent in the next three to five years, but it does think under relative valuation basis, emerging markets look very attractive, he observed.

Yield on 10-year Treasury dropped to 1.86 percent following the Fed’s decision to not hike rates. Asked to explain, Steve said markets look very happy as the Fed has basically signaled it’s in no hurry to hike rates.

JPM’s best case scenario is two hikes all year long with the next hike coming in June – there could be more volatility, especially if the earnings picture gets ugly. JPM is concerned about earnings over the next few quarters as investors are likely to see very negative earnings growth and more pressure on the energy sector. While the US economy is set up for a very nice recovery in the second half of 2016 and into 2017, markets will not be without volatility on the horizon, he noted.

Asked if at a PE multiple of 16.5, earnings really become much more important, Jim answered in affirmative adding it is really about fundamentals in the equity markets. Investors have to see revenue growth as they have basically witnessed relatively unimpressive revenue growth since the recession ended in 2009.

Revenue growth is the only way companies are going to end up with earnings growth. In the US, unemployment currently stands at 4.9 percent while commodity prices are picking up, so the economy will see wage-push inflation at some point.

In Minneapolis, unemployment currently stands at 1.5 percent for college educated workers. If investors look at the part of the labor force that is most expensive and most productive – wages are going up, which will put pressure on businesses and profits, and will ultimately put pressure on the Fed to increase interest rates faster.

So, generally, the outlook for earnings growth in the US is very problematic because businesses are experiencing higher input costs in the form of both wages and commodities, and as a result investors are likely to be somewhat disappointed by earnings throughout the year, he concluded.

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About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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