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Blockbuster corporate profits that are even better than Wall Street anticipates will help steady the recent bout of market volatility and boost share prices, according to J.P. Morgan Chase.
Earnings season is getting into full gear and will accelerate as big financial institutions this week and next report first-quarter activity and their expectations ahead.
The forecast already is lofty — year-over-year growth of about 17 percent that would represent the best quarterly gain in seven years for the S&P 500. Earnings are being driven by improved revenue, the benefits of corporate tax cuts that Congress passed in December, and a lower dollar, higher oil prices and several other factors.
However, J.P. Morgan thinks investors and analysts are underestimating just how much power those factors will have.
When all is said and done, the firm sees earnings up 21 percent.
"We believe the consensus growth does not include the positive impact of rising disposable income (i.e., tax savings, wage increases, one-time bonus), lower household expenses (e.g., utility bills and declining cost for goods/services from industries that have lower pricing power), and rising consumer confidence," Dubravko Lakos-Bujas, head of U.S. equity strategy at J.P. Morgan, said in a note to clients.
The call, though, is somewhat contrarian.
A growing number of investing experts think that the prospects for tax reform, in particular, helped propel the market's 20 percent gain in 2017 and have little firepower left as the big earnings move is already priced in.
Another central tenet of the J.P. Morgan call is that an expected $800 billion in share buybacks this year will serve as another supportive factor for share prices. However, investor surveys have reflected a desire for less cash devoted to repurchases and dividends and more for capital expenditures, research and development, and mergers and acquisitions.
Still, Lakos-Bujas thinks companies will have to spread around how they spend the approximately $2 trillion on their balance sheets at home. Companies also are likely to bring home a chunk of the $3.5 trillion or so they have stored overseas that can be repatriated for just a one-time tax hit.
He also expects that not all the money will go buybacks — capital expenditures stand to improve as well, and there should be an active M&A climate.
"No other time in history have companies held so much cash in a low rate environment," Lakos-Bujas wrote.
In addition, he sees valuation as being friendly. The S&P 500 is currently trading around 16 times earnings, thanks to a sluggish year for the market in which volatility has come back after being dormant for years.
Despite the duration of the nine-year bull market, Lakos-Bujas said prices have traded largely in line with earnings.
Friday will see the first of the big-bank reports, with Citigroup, J.P. Morgan Chase and Wells Fargo on tap.