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Earnings season picks up speed this week with Netflix, Goldman Sachs and IBM among the heavyweights stepping up to the plate.
Expect the unexpected, says Edward Yardeni, president and founder of Yardeni Research.
“Wall Street analysts are predicting a 2% drop on a year-over-year basis in earnings for the first quarter and I wouldn’t be surprised if it turns out to be the right number, just the wrong sign. It could be plus 2%,” said Yardeni.
The problem, he says, is that analysts tend to grow more and more pessimistic as earnings season approaches. Earlier this year, for example, analysts were still expecting slightly positive profit growth for the S&P 500 over the first quarter.
The financials have already proven that upside surprises can be a running theme this reporting season, says Yardeni.
“As we just saw on Friday, the banks may give us some positive surprises. Remember the banks were supposed to get hammered by a flat yield curve and here we’re getting some signs that they can do quite well even in that environment,” he said.
J.P. Morgan and Wells Fargo beat estimates on Friday even after the yield curve between the 3-month and 10-year Treasury notes inverted at the end of the March quarter. A flat, or inverted, yield curve puts pressure on banks’ profit margins because it limits their ability to borrow cheap and provide longer-term loans at a higher interest rate.
Like previous quarters, companies’ outlooks for the rest of the year will likely supersede their earnings results and could lead to big rallies, he adds.
“The key issue is the guidance, and if companies basically report that their business is still growing, they don’t see a recession, which was kind of almost a hysterical risk that the market was discounting at the end of last year. But if companies come back and give some reassuring guidance that the outlook is looking pretty decent, then I don’t know that we’re going to see too many stocks getting hammered,” he said.
Yardeni expects earnings to continue to fuel the market rally this year. He targets 3,100 on the S&P 500 by year-end and predicts 3,500 in 2020, respectively 7% and 20% higher than current levels.