Investing.com – Bank of America said in a recent note that the upcoming earnings season could be a “stock picker’s paradise.”
According to strategists at Bank of America, while market returns were largely driven by multiples in 2022-23, earnings are starting to play a more significant role in 2024, accounting for 45% of the S&P 500’s 12-month returns as of September. .
With the start of the easing cycle, the company believes that earnings will contribute more to future returns.
Interestingly, the options market is indicating a higher level of post-earnings implied volatility for individual stocks this season, in contrast to the relatively low level implied volatility.
“Similar to the recent rotation in the market, we believe this suggests that the real action will be at the single-stock level rather than the index level this earnings season,” the strategists wrote.
Individual stock options are expected to be more expensive this quarter, given the higher implied moving average. Despite this, actual market moves have recently outpaced implied moves, as evidenced by the ratio of realized to implied moves last quarter. Bank of America notes that this downplaying of risks in the previous quarter may be the reason behind the current increase in implied moves.
“An underestimation of risk last quarter may explain the higher move in implied moves this quarter, but if results again lead to higher moves than the options market suggests, gains could end up in the money,” the Bank of America team explains.
“Although only a few companies have reported results so far, we are already seeing some higher-than-expected moves.”
Furthermore, strategists point out that as long as inflation remains under control, strong economic data will continue to support stocks.
After last Friday’s strong jobs report, they see the upcoming Consumer Price Index (CPI) data as more important.
The options market is now expecting a 109 basis point move in the S&P 500 on Thursday, up from 91 basis points last week, marking what could be the largest CPI-driven market shift since May.
While the market may handle a modest rise in inflation due to improving macroeconomic conditions, a major surprise could raise doubts about the ongoing easing cycle and lead to more volatility.