Bad income does not necessarily mean it's a bad time for equities

"Many people think that it's impossible to buy stocks before profits stop getting worse." We continue to disagree with this view, "said Mislay Matejka, head of the bank. Global and European Equity Strategy at JP Morgan, in a research note.

Matejka and his team, who were named the best in their clbad four consecutive years by Institutional Investor at the beginning of the decade, talk about the latest income recession in 2015-16 to explain why the bull market can hold up after a difficult period of time. 2018. The firm favors cyclical stocks such as energy and minors over defensive stocks, depending on market behavior over previous similar cycles.

During this period, the stock market reached its lowest level in February 2016, although the negative trend of earnings revisions continued until December. The market grew 20% before the earnings outlook began to change.

J.P. Morgan expects the profit situation to become positive as early as the second half of this year.

"If this materializes, it should lead to the next stage of the current market rally, as this will be seen as a fundamental confirmation of the rise that many investors are still waiting for," Matejka wrote. In this case, some of the biggest headwinds in the market could become headwinds.

"We sought support for a radical change in the Fed's reaction function, the rising dollar, improved Chinese growth, and positive developments in US-China trade negotiations," he said. did he declare.

In fact, the bull market is characterized by low earnings expectations.

The revisions were made in negative territory 64% of the time over the period, with positive actions 60% of the time, according to JP Morgan. In total, the S & P 500 index has risen by more than 315% since March 2009, despite persistent struggles against the negative opinions of investors, companies and badysts.

JP Morgan's team advises clients not to wait until the earnings structure changes before adding to the stock. On average, over the last four cycles of negative results, equities began to firm up seven months before the turnaround, their average gain being 30%.

During the fourth quarter reference period, companies that missed their earnings estimates faced a significantly lower market penalty than in previous years.

Missing companies saw their price drop just 0.4% on average over the next two days, compared to a typical 2.6% decline, according to FactSet, which points out that the penalty for missed shares is the highest. low since the second quarter of 2009, when the market bottomed out.

J. P. Morgan points out that several companies have actually experienced significant gains the day after a failure.

General Electric recorded an increase of 11.6%, Ingenico Group of 10.5% and STMicroelectronics of 10.2%.