Rising earnings expectations could make it harder for companies to impress investors

As earnings season approaches, Citi Research analysts are warning that high expectations could make it harder for companies to impress investors, which could contribute to market volatility.

The earnings season is set to begin later this week, with banks like JPMorgan Chase (JPM), Wells Fargo (WFC) and Citigroup (C) set to release results on Friday.

Meeting estimates may not be enough to satisfy investors

“Given high growth expectations, markets will likely need to see hikes coupled with solid execution numbers to sustain recent gains or push them higher,” Citi analysts said.

The analysts noted that “while fundamentals are positive and consensus estimates are achievable, valuations suggest the buy side will demand more.”

S&P 500 targets hike ahead of earnings release

Citi analysts raised their year-end target for the S&P 500 to 5,600 and earnings per share (EPS) of $270, saying they “expect valuations to be sustained through year-end but to compress in the year ahead.”

Oppenheimer analysts also raised their price target for the index to 5,900 points and earnings per share of $255.

Analysts noted that “some short-term profit-taking is expected in day-to-day market action, especially in segments of the market that have seen exceptional growth from last year to this year.” They added that the volatility could give investors an opportunity to buy at a lower price.

Artificial intelligence will take center stage

Analysts also expect artificial intelligence (AI) to continue to be a major theme in upcoming earnings reports.

“Markets are fairly pricing in expectations for a rise in the AI ​​premium,” Citi analysts said, though they noted that “places of concern suggest the use of fundamental overlays.”