14 April 2021

US Big Banks to Kick Off Q1 Earnings Season

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News shaping
the markets today

     

What’s happening: Investors are gearing up for some of the largest US-based banks to report their first-quarter results today.

What happened: The biggest financial institutions in the US, including JPMorgan Chase, Goldman Sachs and Wells Fargo, are set to open their books today.

Markets will assess whether their recent enthusiasm around these stocks was justified. Banking stocks have been among the main value stocks to attract investor attention so far this year, when value stocks have outperformed growth sectors.

What are the expectations: Investors expect the major banks to report significant earnings growth for the first quarter.

  • JPMorgan Chase is expected to report adjusted earnings of $3.08 per share, up sharply from 78 cents per share in the year-ago quarter. Revenue is projected to grow 5% year-over-year to $30.52 billion.
  • Goldman Sachs is expected to report adjusted earnings of $10.22 per share, representing a massive jump from the $3.11 per share posted in the same quarter last year. Analysts project revenue growth of 41.7% to $12.39 billion.
  • Wells Fargo is expected to record adjusted earnings of 69 cents per share, versus 1 cent per share in the year-ago quarter, despite an estimated 1.2% year-over-year decline in revenue to $17.5 billion.

Why it matters: While US banks generated healthy earnings in the fourth quarter of 2020, their performance in the latest quarter was propelled by a further improvement in fundamentals.

The rise in bond yields is also expected to benefit banking stocks. The benchmark 10-year Treasury yield almost doubled last quarter, amid expectations of higher inflation and strong economic growth. In March, it surged to a 13-month high of 1.78%, significantly above last August’s level of around 0.5%.

The rising yield curve, depicting a faster rise in longer-term Treasury yields than shorter-dated ones, is beneficial for the banking industry, as it allows financial institutions to borrow at lower rates and lend money at increased rates.

Driven by higher bond trading, banks are expected to report higher trading income for the first quarter. Trading income constitutes a significant portion of revenues for several banks, especially JPMorgan and Goldman Sachs.

Signs of an uptick in the US housing market, along with the manufacturing and services sectors, are also expected to favour banks due to higher borrowings by households and businesses. Banks with a higher focus on consumer businesses, including credit cards and home mortgages, are expected to be the main beneficiaries of the latest trends.

Several big banks had maintained huge sums as loan loss provisions last year, to protect themselves from defaults by clients. The massive loan loss provisions had exerted significant pressure on their 2020 earnings. Banks have now begun reducing these provisions, which will have funds flowing back into their profit margins.

Some banks had announced cost-cutting measures to protect themselves during the 2020 pandemic. These measures are likely to remain in place for some time and continue putting pressure on earnings.

The Markets Today

     

European stocks will be in focus today, ahead of Eurozone’s industrial production report.

Context: European markets settled slightly higher on Tuesday, with investors assessing corporate earnings and economic reports from the region.

Details: Investors monitored the release of several economic reports from the European region on Tuesday.

UK GDP expanded 0.4% in February, missing the consensus estimate of 0.6%. The country’s manufacturing output rose 1.3%, exceeding market expectations of 0.5%. However, services output rose merely 0.2%, widely missing the estimate of 0.6%.

Germany’s ZEW economic sentiment index showed an unexpected decline in investor morale amid worries of a return to tighter lockdown measures. The index for Europe’s largest economy fell to 70.7 points in April, from 76.6 in March, while analysts had expected a rise to 79.0.

Eurozone’s ZEW Indicator of Economic Sentiment also worsened by 7.7 points to 66.3 in April, recording the weakest reading since January.

The earnings season in Europe kicked off on Tuesday with reports from JD Sports, French Connection, Givaudan and LVMH.

The pan-European Stoxx 600 closed higher by 0.1% on Tuesday, with retail stocks adding around 1.6%. However, banking stocks declined by 0.6%. London’s FTSE 100 gained 0.02%, while the German DAX 30 and French 40 added 0.13% and 0.36%, respectively.

What to watch: Markets await industrial production data from the Eurozone and a speech from ECB President Lagarde. Industrial production, which rose 0.8% in January, is expected to decline 1.1% in February.

Rising covid-19 cases remain one of the top concerns for markets, with global infections surging past 137.2 million.

Other Markets: US indices closed mixed on Tuesday, with the S&P 500 and Nasdaq 100 up by 0.33% and 1.21%, respectively, and the Dow Jones index trading lower by 0.2%.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

What else to watch today

     

India's wholesale prices, Spain’s consumer price index, UK’s labour productivity, South Africa’s retail sales, Brazil’s IBC-Br index of economic activity and industrial entrepreneur confidence index as well as the US MBA mortgage applications, import prices, export prices, EIA’s crude oil inventories and Fed Beige Book.

 

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