The upcoming earnings season is poised to be one of the most volatile in stock market history, as traders brace for significant price swings amidst heightened economic uncertainty. Options traders anticipate an average 4.7% move in either direction for individual S&P 500 stocks following their earnings releases, marking the largest expected earnings-day fluctuations on record, according to Bank of America Corp. strategists.
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This heightened volatility stems from lingering concerns about inflation and the potential for further interest rate cuts, leaving investors on edge. The earnings season, commencing with JPMorgan Chase & Co. on Wednesday, will provide a crucial test for Corporate America’s health and the sustainability of the recent equity rally. Traders are looking for reassurance in company performance amidst a challenging macroeconomic environment.
Earnings Season: A Stock Picker’s Market
The anticipated volatility presents a significant opportunity for active fund managers capable of discerning winning companies from losing ones. Savita Subramanian, head of US equity and quantitative strategy at Bank of America, characterized the upcoming earnings season as a “stock picker’s paradise” in a note to clients. The ability to identify companies exceeding or falling short of expectations will be paramount in navigating this volatile period.
The current market backdrop contrasts sharply with the robust performance of US stocks in 2023 and 2024, which saw consecutive years of returns exceeding 20%. However, since reaching an all-time high in December, the S&P 500 has faltered due to rising interest rates and persistent inflation concerns.
High Expectations for Q4 Earnings
Analysts project 7.5% earnings growth for the S&P 500 in the fourth quarter, according to Bloomberg Intelligence data. This represents the second-highest pre-season forecast in the past three years, setting a high bar for companies to meet. The ability of companies to deliver on these expectations will significantly influence market sentiment and price movements.
Earnings as a Key Market Driver
After playing a secondary role in 2022 and 2023 due to macroeconomic uncertainties, earnings re-emerged as a primary catalyst for US equities last year. According to Bank of America data, earnings drove 68% of the 12-month returns for the S&P 500. Companies surpassing both sales and earnings per share estimates significantly outperformed the broader market, highlighting the importance of strong earnings performance.
Navigating the Busiest Reporting Days
Subramanian emphasizes the heightened importance of stock differentiation during earnings season, particularly during the busiest reporting days, which are expected to fall between January 27th and 31st. This period will likely see intensified market activity and potentially amplified price fluctuations. The ability to rapidly analyze earnings reports and make informed investment decisions will be critical for investors seeking to capitalize on opportunities or mitigate potential losses. This earnings season promises to be a pivotal period for the stock market, providing crucial insights into the health of Corporate America and setting the tone for the year ahead.
