Opportunities in the Stock Market: Managing Expectations During Earnings Season

As the earnings season commences with the big banks taking the stage, it’s crucial to manage expectations within the stock market. Despite robust reports from these financial giants, it is unlikely that we will witness a surge in the overall market. The current valuation is already quite high, making it difficult for even strong reports to move the needle.

However, this doesn’t mean that there aren’t opportunities to be found. There are specific stocks that could ride a potential wave of positive numbers, presenting favorable investment prospects. Before delving into these potential gems, let’s first take a broader look at the market.

The Russell 1000 index has experienced an impressive rally, boasting a more than 20% increase since its October low. This substantial growth has resulted in a forward price/earnings multiple of approximately 19 times, as opposed to the previous 15 times. It’s worth noting that this high valuation exists despite the prevailing high interest rates.

In essence, the current stock prices already incorporate projections of solid profit growth for the upcoming year, if not more. Seemingly modest earnings beats will not have a significant impact on the broader market. Only substantial surprises will move the needle.

However, even if earnings fail to impress, it doesn’t mean there aren’t cheaper alternatives that still offer the potential for attractive gains.

In light of this, Evercore strategists conducted extensive research to identify such stocks. They screened the Russell 1000 for companies with market values of at least $10 billion that have ranked in the bottom 50th percentile of performance since late March. This timeframe coincided with a decline in concerns regarding bank failures and overall financial system stability.

To meet the criteria, these companies had to demonstrate consistent strength in both earnings per share and sales performance throughout recent quarters. Specifically, they needed to have beats in at least seven out of the past eight quarters, with no instances of double misses or missed expectations on both the top and bottom lines. Additionally, they had to achieve a double beat in the first quarter of this year, along with a subsequent increase in their share prices during the trading day following the release of their reports.

The following companies emerged as top contenders through this rigorous selection process: Kraft-Heinz (KHC), utility company Southern Company (SO), Procter & Gamble (PG), Hershey (HSY), Citigroup (C), eBay (EBAY), and Lululemon Athletica (LULU).

Now, let’s take a closer look at the last three stocks on this list.

Citigroup: A Potential Buying Opportunity

Citigroup has experienced little growth since the end of March, lagging behind the Russell 1000’s impressive 7% gain. Concerns over loan volumes and a decline in M&A deals have led to decreased earnings expectations for the next year. However, this has also caused a drop in Citigroup’s shares, making them considerably undervalued with a price/earnings multiple of just under 7.5 times, less than half of the Russell’s multiple. Keeping expectations low, if Citigroup manages to surpass estimates, its stock has a strong potential for growth. In fact, the first-quarter beat already resulted in a nearly 5% increase in the stock price. Investors eagerly await the release of Citigroup’s second-quarter numbers on Friday.

eBay: A Discounted Opportunity

eBay’s earnings per share estimates for the year have remained relatively unchanged since March, causing the stock to trade at a significant discount compared to the Russell 1000’s multiple at 10 times earnings. Historically, eBay has traded only slightly below the index, but currently, it presents an attractive buying opportunity. If eBay’s upcoming earnings report on July 26 reveals higher consumer spending, the stock is likely to surge. In fact, the last earnings report already pushed the stock price up by over 5%.

Lululemon Athletica: A Premium Stock with High Growth Potential

Lululemon Athletica stock has seen minimal movement, with EPS estimates remaining relatively steady. However, it has retreated from its record high in November 2021 and now trades at a relatively high 29 times earnings, about 50% higher than the Russell 1000’s multiple. Despite this premium valuation, Lululemon consistently trades at a premium due to its exceptional growth driven by its e-commerce business and trendiness. Even if the upcoming earnings report on September 1 delivers solid results, the stock is expected to receive a significant boost. In fact, the previous report caused a remarkable 11% increase in share value.

With earnings season commencing soon, there is still an opportunity to explore these stocks, although time may be limited.

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