The earnings picture is about to change, likely for the better, and Jamie Dimon may be a big help


The earnings picture is about to change, likely for the better, and J.P. Morgan Chase CEO Jamie Dimon may be a big help. The trading community is on edge as JP Morgan gets ready to kick off earnings season tomorrow. Analysts have been fretting that earnings have turned negative for the first quarter, now expected to be down 2.5% for the S&P 500, the first down quarter since the second quarter of 2016.

But early returns indicate analysts may be too pessimistic.

Look at Fastenal, a reliable but boring industrial company that makes fasteners and construction equipment, beat earnings by a small amount and gave positive commentary, trading up nearly 5% and just shy of an historic high.

Over in Europe, look at luxury goods maker LVMH, an historic high as the maker of Veuve Cliquot champange and the Luis Vitton luxury line reported first quarter sales up 16%…the rich are spending like crazy.

Overall, 25 companies have already reported first quarter results, according to Earnings Scout. 84% are beating expectations–higher than normal–and they are beating by a much wider margin than usual: 7.5 percentage points, much more than the typical 3.5 percentage point beat.

Why is that happening? “Analysts over-reacted in December on concerns over a global slowdown led by China and Europe and cut numbers too much,” Nick Raich from Earnings Scout told me.

If companies beat estimates by anything close to 7 percentage points, then earnings for the first quarter are likely to be up in the low single digits, not negative.

No earnings recession!

As for JPMorgan, which is reporting tomorrow, the key issue will not be the dry facts, it will be the tone Dimon strikes about the global economy. Banks in general are continuing to see loan growth in the low single digits, flat interest income because rates are not moving up, and good credit quality.

Bottom line: no one is expecting amazing numbers.

But Dimon could help change attitudes about the global economy in the second half of the year.

The reason: bulls are hopeful Dimon will say the economy is still growing and paint a positive macroeconomic picture for the economy and for banks.

“If they put up a decent number, and Jamie says, ‘Hey, the economy is still chugging along,’ it will go a long way toward quieting down the recession worries,” Jeff Harte, bank analyst with Sandler O’Neill, told me.

Of course, the markets could still turn down if economic data from China and Europe continues to decline, but the biggest obstacle the market faces may not be earnings, it is valuation. The forward earnings multiple for the S&P 500 (Q2 2019 to Q1 2020) is currently 16.8, at the high end of the historic norm of about 15.

That’s no surprise to David Aurelio, who tracks earnings at Refinitiv: The market tends to get ahead of itself. Traders are anticipating we are near a bottom, and the markets are anticipating stronger 2020 numbers,” he told me.

Looked at that way, he’s certainly right: based on 2020 numbers, the S&P is trading at a 15.5 multiple, about inline with historic averages.

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