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Stock in Advanced Micro Devices has plunged this year.
Dreamstime
The latest corporate earnings news isn’t giving stocks a lift, but it is still possible to find shares that can jump in response to profit reports. One strategy is to look for beaten-down stocks where Wall Street is increasingly upbeat about profits.
It isn’t that earnings have been bad. Aggregate first-quarter earnings per share for the
S&P 500
companies that have disclosed their results so far were 8.7% higher than expected as of Monday morning, according to Credit Suisse data.
Yet the average move in those stocks on the day after the results lagged behind the S&P 500 by 0.19 percentage point, according to figures from
Wells Fargo
.
Companies don’t seem to be getting credit for earning more than expected.
That is partly because stocks are already expensive. The S&P 500 is trading at just under 19 times the aggregate per-share earnings expected for index companies in the coming year. That looks high, given that bond yields have surged of late, reducing the discounted current value of future earnings.
Strategists at Truist recently downgraded stocks in response to those higher yields. And strategists at
Morgan Stanley
are assuming a multiple of 18 times forward earnings in setting their target for the level of the S&P 500, implying that they expect valuations to slip.
When stocks are expensive, they are already reflecting a large stream of profits in the future, so companies must beat earnings expectations by an even greater margin in order to…
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