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Citigroup, JPMorgan, Wells Fargo and Micron are part of Zacks Earnings Preview

Zacks Equity Research

For Immediate Release

Chicago, IL – October 7, 2019 – Zacks.com releases the list of companies likely to issue earnings surprises. This week’s list includes Citigroup C, JPMorgan JPM, Wells Fargo WFC and Micron MU.

Big Banks’ Earnings Preview and Early Q3 2019 Results

The market appears to be double minded about the recent flow of soft U.S. economic data. It is hoping that the bad news of economic weakness will prompt the Fed to be even more accommodative than it would otherwise be. This line of thinking is likely at play in the market’s reaction to the weaker-than-expected September non-farm payroll report.

Notwithstanding, this tendency to look at all incoming data from the Fed perspective, the market is forced at times to see bad news as nothing else but bad news. And that’s the reason why stocks sold off on the weak ISM survey, particularly the manufacturing survey. Even a market addicted to easy Fed policy can’t see anything good or positive in a global economic slowdown.

Banks don’t follow this generalized market behavior because they are worse off either way. The fortunes of these cyclical operators move in lockstep with the broader economy and Fed rate cuts have a negative bearing on their margins.

Banks are cyclical businesses engaged in lending and other activities like investment banking, money management, and trading that are always at the mercy of the economic cycle. Banks not only experience low demand for its services when the economic cycle turns down, but the quality of its existing assets (its loan portfolio) also goes down as its customers’ credit profiles weaken.

It is important to keep this distinction in mind as we start thinking about bank earnings, which get underway with the Citigroup report on Friday, October 11th; JPMorgan and Wells Fargo follow with their reports on Tuesday, October 15th.

Estimates have been steadily coming down for banks, with JPMorgan’s Q3 EPS estimate of $2.42 down from $2.50 three months back. We see a similar trend for full-year 2019 and 2020 estimates for JPMorgan and most of its peers.

What Are Banks Expected to Earn?

Total Q3 earnings for the Zacks Major Banks industry that includes JPMorgan, Wells Fargo and other major industry players are expected to be down -11.1% from the same period last year on -0.1% lower revenues.

Bigger year-over-year declines at Wells Fargo and Bank of America (BAC) are driving most of the industry’s growth weakness in Q3, but the other players are expected to have at best flat earnings relative to the year-earlier period.

For the Finance sector as a whole (Major Banks industry brings in roughly 45% of the sector’s total earnings), total Q3 earnings are expected to be barely in positive territory; up +0.5% on +6.6% higher revenues.

Early Q3 Results

The Q3 earnings season has actually gotten underway already, with results from 21 S&P 500 members out. The 21 S&P 500 members that have reported already have fiscal quarters ending in August, which we count as part of our September-quarter tally. Delta Air Lines (DAL) will be first index member with a September fiscal quarter when it reports results on October 10th.

It is hard to draw any useful conclusions from the results thus far, with the pronounced earnings decline primarily a function of tough comparisons at Micron whose Q3 earnings were down -86.7% on -42.3% lower revenues. That said, the proportion of companies beating revenue estimates is relatively on the lower side.

Expectations for 2019 Q3 & Beyond

For Q3 as a whole, total earnings for the index are expected to decline -4.7% from the same period last year on +4.3% higher revenues, with 12 of the 16 Zacks sectors expected to have lower earnings compared to the year-earlier period, including the Tech sector.

We will know what the final Q3 earnings growth pace turns out to be when all the results are in, but we know that they will be better than these expectations, likely close to the flat line that we saw in the first half of the year.

Tough comparisons to last year when growth was boosted by the tax cut legislation were all along expected to weigh on earnings growth in 2019. Moderating U.S. economic growth and notable slowdowns in other major global economic regions are having a further negative impact. Uncertainty about the global trade regime and growing resort to tariffs are not helping matters either.

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