Big Banks To Kick Off Q4 Earnings Season Amid Expectations For First S&P 500 Profit Decline In More Than 2 Years

The fourth-quarter reporting season is around the corner, and it is one of the key catalysts that will likely determine the near-term stock market trajectory.

Muted Expectations: Earnings of S&P 500 companies are expected to show a 4.1% year-over-year drop in the fourth quarter, FactSet said in its weekly “Earnings Insight” report. This would mark the first year-over-year earnings declines since the third quarter of 2020, when earnings slid 5.7%, the report said.

About 65 S&P 500 companies have issued negative earnings per share, or EPS, guidance, while 35 companies guided EPS below consensus.

FactSet highlighted another worrying statistic. Analysts typically lower EPS estimates during the quarter, and this time around the average reduction was 6.3% between Sept. 30 and Dec. 31. This compares to the five-year average of 2.5%, 10-year average of 3.3%, 15-year average of 4.8% and the 20-year average of 3.8%.

Sector-Wise Expectations: Four of the 11 sectors are expected to report earnings growth in the fourth quarter, FactSet said. The biggest contribution to earnings growth will come from the energy sector, which is expected to have seen 62.7% earnings growth.

The second-biggest contribution will likely come from the industrials sector, which may have grown its EPS by 38.5%. Boeing Company BA and airlines would be the best performers within the sector.

On the other hand, the material, consumer discretionary and communications services sectors will likely be the biggest drags on earnings growth, with estimated earnings declines of 26.3%, 20.3% and 19%, respectively.

The forward P/E ratio for the S&P 500 is 16.5, below the five-year average of 18.5 and 10-year average of 17.2, FactSet said.

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Key Earnings For Upcoming Week: The unfolding week will see earnings reports from big banks and a handful of other S&P 500 companies. To be precise, nine S&P 500 companies, including two Dow 30 components, are scheduled to report earnings.

The financial sector is expected to see a 12.2% EPS decline, while revenues of these companies may have risen 4.8%, according to FactSet.
A provision-led consensus miss is likely as banks bake in a higher probability of a tougher economy into current expected credit loss, or CECL, reserves, Morgan Stanley analyst Betsy Graseck said in a recent report. The analyst also expects higher expense guidance for 2023 due to wage inflation.

Morgan Stanley’s preferred bank names going into the earnings period include Wells Fargo & Co. WFC, Northern Trust Corp. NTRS and JPMorgan Chase & Co. JPM.

Deutsche Bank analyst Matt O-Connor last week downgraded Bank of America Corp. BAC and JPMorgan from Buy to Hold. While noting that bank stocks have rallied off the Oct. 12 bottom, the analyst said the sector is still trading off its peaks, pricing in a 65-70% probability of a moderate or worse recession.

The following bank stocks are scheduled to report their fourth-quarter results Friday before the market opens:

• BofA
• Bank of New York Mellon Corp. BK
• JPMorgan
• Wells Fargo
• Citigroup, Inc. C

Asset manager BlackRock, Inc. BLK is also due to report on Friday.

Other Key Earnings Reports For The Week:

Tilray Brands, Inc. TLRY (Monday, before the market open)
KB Home, Inc. KBH (Wednesday, after the close)
Taiwan Semiconductor Manufacturing Company Limited TSM (Thursday, before the market open.
Delta Air Lines, Inc. DAL (Friday, before the market open)
UnitedHealth Group, Inc. UNH (Friday, before the market open)

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