Bank stocks have been enthusiastic participants in the post-Christmas bounce in the market, but they remained a weak part of the market overall last year. The chart below shows the stock market performance of the Zacks Major Banks industry, which includes the space’s leading players, relative to the S&P 500 index in 2018.
Citigroup (C ) kicks-off the Q4 earnings season for the group on Monday, with JPMorgan (JPM) and Wells Fargo (WFC) following it on Tuesday, January 15th. A host of industry players, including Goldman Sachs (GS), Morgan Stanley (MS), a number of the regional players and asset managers are also on deck to come out with results this week. In all, we will get Q4 results from more than 60 companies this week, including 34 S&P 500 members.
The question is whether these quarterly results can serve as a catalyst for bank stocks?
To answer that question, we need to keep in mind that the issue with these stocks was not a lack of operating performance, but rather big-picture uncertainty. On most key operating metrics, bank performance has been very strong in the first three quarters of the year and most of those favorable trends will show up in the Q4 results as well.
Key parts of the market’s worry list for banks include the flattening yield curve and potential for inversion that has implications for the economy’s health beyond 2019. The Fed’s openness to change its tune in recent days is essentially an acknowledgment of the same late-cycle narrative. Keep in mind that 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.
Even if we keep aside the market’s other worries like trade uncertainty, global growth and political issues, it is this late-cycle worry that has been the big weight on sentiment on bank stocks. That said, it is reasonable to expect that with valuations this compressed already, strong results will give many of these stocks a short-term bump. But a fundamental rerating may be not be possible till the big-picture worries are put to rest.
How Low Will Estimates Fall?
Earnings estimates for 2018 Q4 and full-year 2019 have been coming down lately, but they likely have more room to go down given the headwinds. The chart below shows how estimates for 2018 Q4 have evolved since the quarter got underway.
Q4 estimates have come down for all 16 Zacks sectors, with the highest magnitude of negative revisions for the Conglomerates, Construction, Energy, Consumer Discretionary, Utilities and Basic Materials sectors.
This isn’t the first time that estimates have come down like this. But this is nevertheless a higher magnitude of negative revisions than we have seen in the comparable periods over the preceding four quarters.
Please note that the negative revisions trend isn’t restricted to Q4 estimates, as expectations for full-year 2019 have started coming down in a meaningful way lately as well, as the chart below shows.
This chart is tracking consensus earnings growth expectations for the S&P 500 index since the second half of the year got underway. As you can see, estimates were effectively unchanged during the September quarter, but they have been on a steady downtrend since early October. Many in the market suspect that estimates have further to drop before stabilizing.
Q4 Earnings Season Scorecard (as of Jan. 11th, 2019)
The Citigroup release on Monday will put the spotlight on the Q4 earnings season for the market. But the reporting cycle has officially gotten underway already, with results from 20 S&P 500 companies already out. All of these 20 companies reported results for their fiscal November-quarter results, which we count as part of the December-quarter tally. As mentioned earlier, we have another 34 index members reporting results this week.
Total Q4 earnings for these 20 index members that have reported results already are up +17% from the same period last year on +10.7% higher revenues, with 80% beating EPS estimates and 65% beating revenue estimates.
The earnings growth pace and the proportion of positive EPS surprises for these 20 S&P 500 members is tracking below what we had seen from the same group of companies in the preceding earnings season, as the comparison charts below show.
For Q4 as a whole, total earnings for the S&P 500 index are expected to be up +10.5% from the same period last year on +5.3% higher revenues, which would follow the +25.7% earnings growth on +8.4% higher revenues in 2018 Q3.
Earnings growth is expected to be in double digits for 7 of the 16 Zacks sectors, with Energy (+64.7% growth), Finance (+18.6%), Construction (+26.3%) and Transportation (+22.5%) has the strongest growth. Tech sector earnings are expected to decelerate meaningfully in Q4, up +3.7%, after back-to-back quarters of very strong growth. The Tech sector’s growth pace has come down the most in recent days as analysts adjusted their estimates lower following the Apple pre-announcement.
Three sectors are expected to have lower earnings in Q4 relative to the year-earlier period, namely Conglomerates (-13.1% decline), Autos (-13.8%), and Utilities (-6.3%).
The table below shows the summary picture for Q4, contrasted with what was actually achieved in the preceding earnings season.
The chart below shows Q4 earnings and revenue growth expectations contrasted with what is expected in the following three quarters and actual results in the preceding 4 quarters. As you can see in the chart below, the growth pace is expected to decelerate materially from what we saw in the first three quarters of the year.
The chart below shows the same data on a rolling 4-quarter basis.
Whether we look at the growth picture on a quarterly basis or on a rolling quarter basis, there is no doubt that growth peak is now behind us. The question now is how much estimates for the coming quarters have still to come down. And the answer to that question will depend on the evolving economic backdrop that we discussed at the start.
For more details about the overall earnings picture, the Q4 earnings season and expectations for the coming periods, please check our weekly Earnings Trends report.
Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on Zacks.com and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview.
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