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This Wall Street Bait & Switch Will Justify the Dow’s Next All-Time High

Last Updated September 23, 2020 2:03 PM
Sam Bourgi
Last Updated September 23, 2020 2:03 PM
  • Bank of America sees surprise earnings upside for Q2 2020.
  • If history is any indication, stocks tend to rise when earnings beat expectations–no matter how low expectations are set.
  • A fifth of S&P 500 companies will report quarterly results next week.

The U.S. stock market has rebounded more than 40% off its March lows, but with the exception of the tech-focused Nasdaq, new record highs have been elusive. That could be about to change if corporate earnings exceed Wall Street’s dismal projections.

Bank of America: Expect ‘Big Earnings Beat’

Although most analysts are preparing for a grim earnings quarter due to the pandemic, Bank of America expects positive earnings surprises in the coming weeks.

Strategists at the bank say there is a “big beat ahead” for S&P 500 companies.

That doesn’t mean Q2 2020 earnings will be positive; it just means expectations have been set so low that “big beats” are easier.

S&P 500 Index
The S&P 500’s ‘V-shaped’ recovery hit a snag in early June. Will positive earnings surprises help the index over the hump? | Chart: Yahoo Finance 

Bank strategist Savita Subramanian told clients :

Estimates for 2Q have been slashed ~40% over the last three months – the highest pre-season EPS cut since ’08. This, as well as a host of other factors, support a big 2Q beat.

Positive earnings surprises are expected for Facebook, Apple, Amazon, Dollar General, Activision Blizzard, Lockheed Martin, and Morgan Stanley, among others.

Gaming the Market

If the post-crisis bull market has taught us anything, it’s that Wall Street knows how to manipulate earnings expectations. Corporations are experts at playing the ‘expectations game’  by suppressing guidance and producing positive surprises during the earnings call.

Beating expectations is now expected, which gives equity bulls more justification to bid up prices. Corporate executives whose compensation is tied to share prices benefit, too.

The estimated second-quarter earnings decline for S&P 500 companies is -43.8%, according to FactSet . Only 49 companies have issued guidance for Q2, which is less than half of the five-year average for the quarter.

With expectations so low, don’t be surprised if several companies surprise to the upside. That could mean new record highs for the Dow Jones  and S&P 500. Respectively, these indexes came within 7% and 5% of all-time highs in early June despite no underlying fundamental support.

Dow Jones Industrial Average
Several Dow Jones components will report quarterly results in the coming weeks. | Chart: Yahoo Finance 

As CNBC reports, a fifth of S&P 500 companies are scheduled to report earnings next week. These include heavy hitters  like Microsoft, Johnson & Johnson, JPMogan Chase, UnitedHealth, and Netflix.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.