JPM says investors too gloomy on company earnings

Investors are too pessimistic about prospects for company earnings with positive implications for European banks and other cyclical shares, JP Morgan said.

Consensus projection predict a 10% drop in US earnings and a 25% plunge at European companies for the fourth quarter. This weakening from the third quarter is at odds with strengthening industry surveys, JP Morgan analyst Mislav Matejka said, adding that European projected earnings growth is at its lowest point during the pandemic.

"Big picture, and looking beyond the current dislocation with third lockdowns, where guidances could be lukewarm, we expect a significant, and likely sustained, activity acceleration from Q2, which should benefit a number of cyclical and value sectors," Matejka wrote in a note to clients.

Earnings will be bolstered by a surge in cash, policy support, pent-up demand, ease base effects and an easing of restrictions as vaccines are administered, Matejka said. Sectors showing the biggest shortfall in earnings compared with before the pandemic include energy, transport, banks, and hotels, restaurants and leisure.

Sectors and stocks that show the biggest shortfall in earnings vs pre-Covid-19 are likely to get a boost, especially those that show high positive correlation to PMIs," he wrote. "We believe the risk-reward for banks in particular is positive and we reiterate our upgrade of the sector."

JP Morgan is positive about the prospects for European banks but less so for UK lenders. Strong balance sheets, attractive valuations, prospects for dividends and a better earnings backdrop will support banks, Matejka said. The bank is less positive on UK banks because of tougher regulation and a worse outlook for dividends.

The bank's picks include UBS, Credit Suisse and Julius Baer for investment banking and asset gathering and BNP Paribas, Societe Generale and ING for solid book value.