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Consensus expectations are a bit too optimistic, and investors should continue to be conservatively positioned, said Wells Fargo strategist Scott Wren in a market commentary note.
Earnings season results typically show that between 65-70% of companies beat their consensus expectations. But, for a few quarters since the Covid-19 pandemic, the results showed that between 75-80% of companies beat expectations.
What’s been happening is that many companies are avoiding making overly aggressive guidance “to rather under promise and over deliver,” since that tends to be positive for stock prices, said Wren.
Currently, consensus data gathered by Bloomberg shows an 8.1% earnings year-over-year growth rate for the S&P 500 (SP500) during the second quarter, despite a mild slowdown in the economy. Second quarter consensus also estimates that four out of 11 sectors will have negative year-over-year earnings vs. three sectors during the first quarter.
“Investors need to realize that earnings growth has been concentrated in a relatively small number of tech and tech-related companies in recent quarters, just as the bulk of the S&P 500 (SP500) gains this year has been carried on the shoulders of a handful of these same companies,” said Wren.
Some of the companies reporting this week include PepsiCo Inc. (PEP), Delta Air Lines (DAL), JPMorgan Chase & Co. (JPM), Citigroup (C), Wells Fargo (WFC), and Bank of New York Mellon (BK).