Don’t bank on an upbeat corporate earnings season to drive equities higher as much of the optimism is already priced in following the record-breaking rally this year, according to JPMorgan Chase & Co. strategists.

First-quarter profit estimates have been reduced going into the reporting period, lowering the bar for Corporate America to beat expectations, the team led by Mislav Matejka wrote in a note. S&P 500 earnings are projected to outright decline when excluding the technology behemoths, the strategists said.

At the same time, investor positioning is looking “very stretched” with the benchmark index scaling record highs on optimism around resilient economic growth and lower interest rates, Matejka said.

“Equities have already had a good run into the results, suggesting that investors are more optimistic than the downbeat earnings projections by sell-side analysts convey,” he said. “We need to see clear earnings acceleration in order to justify current equity valuations, which we fear might not come through.”

Half of the US companies that have reported so far underperformed the market on the day of reporting, Matejka said.

JPMorgan’s equity strategists have remained among the more bearish voices on Wall Street, even as the S&P 500 rallied 10% in the first quarter. The gains have since cooled slightly after hotter-than-expected inflation data reduced the odds of Federal Reserve rate cuts. Increasing geopolitical tensions following Iran’s unprecedented strike on Israel are also feeding into volatility.

Matejka said equities were underestimating the impact of elevated price pressures on central bank policy and bond yields.

“While some of the move in yields was likely due to the optimistic growth outlook, we believe most of it was driven by sticky inflation,” the strategist wrote. “The risks of interest rates spiking for the ‘wrong reasons’, the Fed pivot getting fully reversed and inflation staying too hot are all elevated.”

Morgan Stanley strategist Michael Wilson also warned about the impact of higher rates on stock valuations. He expects equities to show greater sensitivity to rates with the US 10-year bond yield spiking above 4.4%.

“Under the surface, valuation dispersion is on the rise as the market becomes more discerning around quality and earnings achievability,” Wilson said. “Stock reactions during earnings season will likely provide an indication as to how much risk there is to valuations.”

Not everyone is as pessimistic. Societe Generale SA strategist Manish Kabra expects a strong earnings season to continue to drive the bigger US stocks. While rising bond yields may be a headwind for the S&P 500, a “long plateau of Fed rates should keep a lid on yields,” he said last week.