Wall Street is expecting the worst this earnings season. But Bank of America says traders will be pleasantly surprised.

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Earnings season is about to kick off as hundreds of public companies prepare to report financial results for the second quarter of 2019.
Consensus estimates call for an earnings contraction of 2%, compared to the same period last year.
But a team of analysts at Bank of America Merrill Lynch have a more optimistic view.
The firm’s analysts expect the S&P 500 to beat expectations by 2% and generate $41 in earnings per share, which would leave year over year growth flat.
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The second-quarter earnings season might surprise Wall Street analysts — in a good way.

A new report from Bank of America Merrill Lynch defies Wall Street’s dismal outlook for this upcoming earnings season and expects the S&P 500 to beat consensus targets by 2%.

Wall Street currently expects the S&P 500’s earnings to fall by 2% in the second quarter from the same period last year, which would be the first such decline since 2016. Small-cap earnings are expected to be take a much bigger hit, with a predicted 12% drop from last year.

The materials and industrial sectors are leading the decline in estimates due to their exposure to China, according to the report. Analysts also forecast tech earnings to shrink by 12% compared to the same quarter last year.

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The weak earnings outlook isn’t a new story for Wall Street. Analysts expected first quarter earnings to drop by 2% year-over-year. Then the S&P 500 ended up outperforming estimates with a 3% increase in earnings in the first quarter.

BAML’s team of analysts, led by Savita Subramanian, found that 86% of the 21 companies that have reported second results so far have beaten EPS expectations, which they consider a good sign for the rest of the season.

"Early reporters corroborate our positive view: two thirds of early reporters have beaten expectations on EPS and sales (vs. less than half typically), where early reports are good harbingers of full quarter results," Subramanian said in a research note to clients on Tuesday.

The analysis also found that ISM manufacturing and non-manufacturing indices, which are strongly correlated with S&P 500 earnings, have also fallen to their lowest levels since 2016.

BAML’s analysts will be watching how management approaches future earnings guidance and noted that companies have been wary of trade tensions and weaker global growth.

"With a truce with China at G-20, we will be watching for evidence of a recovery in guidance this earnings season," the firm said.

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