Stocks Could Rally if They Can Meet or Beat Given Very Low Expectations – Wells Fargo

By Senad Karaahmetovic

Wells Fargo equity analysts see the case for better-than-expected reactions to U.S. earnings reports amid very low expectations.

Vulnerable sectors, like cyclical, could react positively if companies can “meet or beat” already low expectations, analysts wrote in a client note.

“Q3 earnings reactions are off to a tough start. We expect reactions to improve as we move through the season, but the not-so-great tone from early reporters, coupled with a generally bleaker macro environment, has weighed on sentiment. Lowered expectations may have already re-priced some stocks ahead of announcements, especially in more vulnerable (i.e., cyclical) sectors,” the analysts said in a client note.

They told the firm’s clients to focus on GARP (growth at a reasonable price) stocks, which “may have longer-term upside in what we expect to be a challenged growth environment in 2023.”

However, those companies that miss already low expectations could face an “even harsher penalty.”

“We draw parallels to 3Q18, which featured an aggressive tightening cycle, a weakening market, and peaking/slowing of EPS growth. Rewards were lower (Beats +36bps vs. historical average +58bps), while penalties were harsher (Misses -304bps vs. -220bps). Similar to 3Q18, today’s macro backdrop appears to be weighing on post-earnings reactions,” analysts concluded.

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