Bank of America: Q3 Earnings Season Kicks Off, Investors Will Enjoy a "Stock-Picking Paradise"
Bank of America stated that the third quarter will be an "excellent environment" for stock pickers, with the performance of S&P 500 index constituents driving a significant portion of the index's returns. The bank's stock and quant strategists pointed out that the pricing in the derivatives market reflects the highest implied volatility since the release of individual stock earnings reports since 2021. Following the Fed's rate cut, it is expected that company earnings will play a larger role in future returns. S&P 500 constituents, including Domino's Pizza and JP Morgan, will announce their earnings this week
According to the Wisdom Financial APP, Bank of America stated that the third quarter will be an "excellent environment" for stock pickers, with the performance of S&P 500 index component stocks driving a significant portion of the index's returns.
The bank's stock and quantitative strategists believe that the pricing in the derivatives market reflects the largest implied volatility at the single-stock level in its data history since 2021. As of September, corporate earnings have contributed 45% to the 12-month return of the S&P 500, while in the "macro-dominated market" from 2022 to 2023, corporate earnings multiples lag far behind the return.
Bank of America's stock strategist Ohsung Kwon stated in a report on Sunday, "This earnings season may be a paradise for stock pickers." Kwon mentioned the Federal Reserve's sharp 50 basis point rate cut last month to 4.75%-5%, stating, "With the start of an easing cycle, we expect corporate earnings to account for a larger proportion of future returns."
S&P 500 index component companies will kick off the third quarter earnings season this week, with companies such as Domino's Pizza (DPZ.US), investment bank JP Morgan (JPM.US), Wells Fargo (WFC.US), and BlackRock (BLK.US) set to announce their performance.
Bank of America stated that option prices for third-quarter profits may be more expensive than recently seen, with the average stock price increase implying a trend. However, realized volatility has been higher than implied volatility recently, with the average of realized or implied volatility standing at 1.2 so far. Bank of America released the following chart:
Kwon stated, "The underestimation of risks in the previous quarter may explain the reason for the increase in implied volatility this quarter, but if actual earnings performance once again leads to levels of volatility greater than expected by the options market, purchased straddle options may be in-the-money at expiration."