JPMorgan: Don't Expect Earnings Season to Drive Stocks Higher

• JPMorgan (JPMorgan) strategists said investors should not hope that strong earnings will further boost the stock market.

• Stock prices have been stretched to the limit and there is a clear gap between Fed policy and stock trading this year.

• Investors' overconfidence in the economy and market outlook poses a risk to market performance.

The company is coming off a brand new earnings season, but JPMorgan says investors are unlikely to see their stock move higher on the back of an optimistic first quarter.

JPMorgan strategists, led by Mislav Matejka, said in a report on Monday that various indicators point to strong earnings for U.S. companies, but earnings overshooting is no guarantee of a stock market rally, especially in tight market conditions.

Broken down, Wall Street's consensus forecasts for corporate earnings have fallen sharply over the past few months, and earnings per share for the S&P 500, which excludes mega-cap tech stocks, have declined for the fifth consecutive quarter, the report said.

This lowering of expectations, along with the increased upward momentum in equities over the past three months, should bode well for strong earnings going forward, but strategists do not believe this will translate into a significant rise in equities, as the market's over-optimism is already evident in prices.

"The stock market has had a nice run after the earnings announcement, which suggests that investors are more optimistic than the pessimistic earnings forecasts communicated by sell-side analysts," Matejka said, adding that there is a clear gap between expectations for Fed policy this year and how the indexes have traded.

At the same time, half of the U.S. companies that have reported so far have fallen short of expectations, Matejka noted.

"Much of the equity market's performance this year and over the past 18 months has been driven by multiple expansion. We would need to see a clear acceleration in earnings to justify the current valuation of equities, but we are concerned that this may not materialize," he said.

They point out that people are overly complacent about the economy and the market outlook, and that the implied recessionary potential is at its lowest level ever.

Investors seem to be focusing on the "Goldilocks" setup, where the economy doesn't land and the central bank stays accommodative. Strategists added that the Consumer Price Index, which for the fourth month in a row has reported hotter-than-expected results, suggests that the stock market has so far ignored the Fed's "high-growth" policy outlook.

"While some of the movement in yields may be due to a more optimistic outlook for economic growth, we believe the bulk of the movement is driven by persistent inflation," said Matka." The risks of interest rates spiking for the 'wrong reasons', a complete reversal of the Fed's center pivot, and persistent overheated inflation are all on the rise."

The bank's own earnings beat Wall Street's expectations, but Chief Executive Officer Jamie Dimon warned that inflationary pressures remain and that the market is only just beginning to feel the effects of the historic monetary tightening by the Fed and other global central banks.

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