Q3 earnings season could be a stock picker's paradise: BofA By Investing.com
Investing.com — The upcoming earnings season could be “a stock picker's paradise,” Bank of America said in a recent statement.
According to BofA strategists, while market returns were largely driven by multiples in the 2022-23 period, earnings have begun to play a more important role in 2024, accounting for 45% of the S&P 500's 12-month return as of September.
With the start of the downsizing cycle, the company believes that earnings will contribute significantly to future returns.
Interestingly, the options market shows a high level of post-earnings implied volatility for each stock this season, in contrast to the low implied volatility at the level.
“Similar to recent market volatility, we believe this suggests that the real action will be at the individual stock level rather than at the index level this earnings season,” the strategists wrote.
Individual stock options are expected to be priced this quarter, given the high implied valuation. Despite this, the actual market movement has recently exceeded the implied movement, as evidenced by the average movement observed for the last quarter. This underestimation of risk in the previous quarter could be the reason for the current increase in implied measures, BofA notes.
“The decline in risk premiums last quarter may explain the decline in the stated rate this quarter, but if results again lead to higher trends than the options market suggests, earnings estimates may become obsolete,” explained the BofA team.
“Although few companies have announced results so far, we're already seeing higher-than-expected momentum.”
In addition, strategists suggest that as long as inflation remains under control, strong economic data will continue to support stocks.
Following last Friday's strong jobs report, they see the upcoming Consumer Price Index (CPI) data as very important.
The options market now expects a 109-basis-point move in the S&P 500 on Thursday, up from 91bps last week, marking what could be the biggest CPI-driven market swing since May.
While the market may handle a modest increase in inflation due to improving macroeconomic conditions, a significant surprise could raise doubts about the ongoing easing cycle and introduce more volatility.
