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THE RISK OF HIGH EXPECTATIONS AHEAD OF EARNINGS

One worry for this earnings season is that analysts' projections may be too bullish, and that technology companies in particular will not be able to beat those bullish expectations, according to a note from Yardeni Research.

"The risk is that Q1's exceptionally strong results led them to raise their estimates for the remaining three quarters by too much," the note says.

Recent data from Tajinder Dhillon, head of earnings and equity research at LSEG Data & Analytics, shows analysts are expecting 24.4% year-over-year earnings growth from S&P 500 .SPX companies for the second quarter, compared with 29.4% growth in the first quarter.

The biggest year-over-year growth for the second quarter is expected in energy, information technology and materials sectors, the note says.

Some of the best-performing tech stocks "may get hit if they don't beat already heady expectations," it adds.

A rotation into sectors that have lagged may help investors.

"The big risk up ahead is that technology companies, especially the hyperscalers, won't beat analysts' overly optimistic earnings growth estimates for the quarter. That could cause a correction among technology stocks. The overall stock market might dodge a correction if investors rotate into sectors that have lagged and report better-than-expected earnings. We are in the rotation camp for the stock market's outlook up ahead," the Yardeni note says.

Earnings season gets moving next week when many of the big U.S. banks including JPMorgan Chase JPM.N report results.

(Caroline Valetkevitch)

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