JP Morgan expects US and euro area company earnings to surprise positively in Q1

Earnings beats will be rewarded, not faded, strategists at JP Morgan believe, telling clients stocks were set to extend their rebound even as yields continued to move higher, as corporate earnings on both sides of the Atlantic "surprised" to the upside.

Whereas analysts had penciled in a 9% increase in US earnings per share for the first quarter, excluding the impact of tax cuts, Mislav Matejka and his team believed profits were set to deliver a mid-single digit surprise.

Although activity indicators on both sides of the Atlantic stalled in February and March, they remained above the levels seen in the fourth quarter of 2017 and "much stronger" than a year ago.

Yet consensus EPS growth forecasts of 9% were less than what was delivered during the first three months of 2017.

In the euro area, EPS was seen jumping by 14%, despite the headwind from the stronger euro, which had appreciated by 9% over the past year on a trade-weighted basis, Matejka said.

"As the worst of the FX headwind might be happening right now for Eurozone, the relative revenue beats should start shifting toward the region in 2H," he said.

The equity strategist had a especially constructive view on lenders' shares, which he believed would catch-up with higher bond yields.

"We believe the reporting season will be taken well as equities derated in Q1 and beats are rewarded, not faded – out of 45 companies in the US that reported earnings beats so far, the median outperformance on the day is 0.5%."