Bank of America says that the start of earnings season will be a critical stock-picking period. Strategist Savita Subramanian says a recession is coming, and earnings projections will get slashed. Subramanian identified companies that BofA expects to beat expectations again this quarter. Bank of America has been pretty bearish on US stocks this year, but it says that investors who play their cards right have the chance to build an advantage in the weeks ahead.
US companies are starting to report their first-quarter results, and Head of US Equity and Quantitative Strategy Savita Subramanian says that late April should be an especially good period for stock pickers.
“For short-term investors, stock differentiation is heightened during earnings season, particularly the busiest reporting days,” she wrote in a recent note to clients.
She added that the focus this quarter won’t be on a company’s current performance. Instead it will be on guidance, especially regarding how the recent banking crisis and how changing financial conditions are affecting company spending — which could hurt revenue for many companies — as well as stock buybacks, since reduced buybacks might contribute to weakness in stock prices.
“With the SVB collapse in March, data started to notably slow,” Subramanian wrote. “Overall, macro indicators that we track were largely mixed during the quarter, but the recent softness points to further weakness ahead.”
She also wrote that right now, Wall Street earnings projections for 2023 and 2024 look unrealistic if a recession is on the way. But typically, analysts lower their estimates one quarter at a time when the economy is weakening. Subramanian believes that they won’t fully adjust their expectations to reflect a recession until that recession has actually started.
“Consensus 2024 EPS of $247 (+12% YoY) looks ambitious,” she wrote. “We think getting back to 2022 EPS of $218 is a good starting point for 2024 EPS, which would suggest actual EPS returning to ‘normalized EPS’ by next year”
But even with that backdrop of overly optimistic earnings projections and an oncoming recession, Subramanian thinks that some worthwhile investing opportunities are revealing themselves. She and her team recently assembled a list of 10 stocks that have “Buy” ratings from BofA analysts, that beat earnings and sales estimates in last quarter, and look like they’ll do it again in the current quarter.
Eight of the 10 are also under-owned by actively managed funds relative to their weight in the S&P 500. That could be another potential source of upside: if the companies make a habit of beating expectations, those funds could increase their weightings and hold them for the long term.
The two that aren’t underweighted as of April 13 are General Dynamics and Becton Dickinson.
All 10 stock picks are listed below, along with each company’s ticker, sector, and expected report date.