US Earnings Disappoint But Valuations Look Good

Earnings season in the US has been disappointing, capping a difficult year of reduced earnings growth and resulted in a flat stock market, but JPMorgan is buoyant

J.P. Morgan Asset Management 24 February, 2016 | 10:10AM

Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, James Liu, of the JP Morgan Global Markets Insights Strategy Team, explains why investors should not be put off by a poor earnings season in the US.

U.S. earnings continued to disappoint in the fourth quarter of 2015, more than a year after the headwinds from oil and the U.S. dollar emerged. This slowdown in earnings growth has added to the cloud of uncertainty facing equity markets. Unlike in years past, when geopolitical and global growth concerns had been allayed by strong U.S. earnings, these disappointing results have provided little comfort during this difficult start to the year. However, full-year 2016 estimates are still positive, and this is what should drive long-term investment views.

Thus, while risks to the equity story have clearly increased, there is potential upside from here. Markets are pricing-in extreme scenarios, with nearly 65% of S&P 500 companies in bear market territory and sentiment at cycle lows. Our base case is that the U.S. economy continues to grow and that earnings can recover from macroeconomic headwinds. With the market effectively on sale, we believe there are significant stock-picking opportunities for active managers.

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About Author

J.P. Morgan Asset Management  is the investment arm of JPMorgan Chase & Co. and it is one of the largest active asset managers in the world.

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