Earnings Season Off to Strong Start As Big Banks Beat Expectations

Today could be an interesting one for people who’ve followed this wild back-and-forth market the last few weeks. After strong earnings from three of the biggest banks, the S&P 500 (SPX) finds itself on the cusp of an important price level that could help determine its action over the coming days.

Before getting to that, the key question early on is how the bank earnings came in from Citigroup inc C, Wells Fargo & Co. WFC, and JPMorgan Chase & Co JPM. Those earnings could have a big impact on whether the market gets momentum to move past that key level, which is 2670 for the SPX.

Big Banks Beat

JPM kicked things off Friday by easily beating Wall Street’s Q1 expectations on both the top- and bottom- line. Earnings of $2.37 a share and revenue of $28.52 billion surpassed analysts’ projections of $2.28 and $27.5 billion. CEO Jamie Dimon said in a statement that “2018 is off to a good start with our business performing well across the board.” He also said the global economy “continues to do well,” and the bank remains optimistic about the “positive impact” of U.S. tax reform.

Citigroup (C) followed JP Morgan with another earnings beat, posting earnings per share of $1.68 vs. Wall Street analysts’ expectations for $1.62. Revenue of $18.9 billion was in line with analysts’ expectations. In a press release, C said revenue gains of more than 3 percent from a year earlier were driven by growth in both the Institutional Clients Group (ICG) and Global Consumer Banking (GCB). The release also referred to “uneven market conditions” so far this year.

Wells Fargo (WFC), the third bank to report early Friday, also had earnings per share that beat expectations at $1.12, vs. analysts’ projections of $1.07. Revenue of $21.9 billion slightly beat Wall Street’s projections for $21.7 billion, but was down from $22.3 billion a year earlier. The company said in its press release that it has “made progress” on its priority of rebuilding trust after the recent sales controversy but also recognizes “it will take time to put all of our challenges behind us.”

Breaking Down the Bank Earnings Numbers

Beneath the headline numbers there are some early takeaways: First, JP Morgan really had an excellent quarter overall, but keep in mind that the company’s revenue did benefit from an accounting rule. Also, currency and commodity trading did great but the fixed income desk didn’t do as well as some people thought it would.  It’s important to hear what Mr. Dimon has to say later today.

WFC did well, but their revenue did decrease, and loans were down almost $800 million from Q4, so that’s something where investors might want to dig a little deeper and find out causes. Also, net interest margin at WFC was flat, below expectations. On the whole, WFC was probably the least cheery of the three.

Citigroup saw currency and commodity trading fall 7 percent from a year ago, and the trading group didn’t do as well as some had projected.

These are mostly minor quibbles, and pre-market trading showed gains for all three of the banks. 

Bank earnings could possibly provide some stability for the market after months of jumpiness. Perhaps more important than the numbers is what bank CEOs say on their earnings calls. If they see smooth sailing ahead and aren’t overly worried about tariffs, that could potentially give the market a tailwind.

A Key Technical Level?

Now, back to why this session is so interesting, arguably for both long-term investors and daily traders. The SPX has spent the last couple of weeks bouncing in a channel between the 200-day moving average which is currently around 2597 on the downside and on the upside at 2670, a level seen as key resistance by many traders. The question is whether the bank earnings we just discussed could be enough to push the index through that resistance level, which it broached briefly yesterday. Given the earnings results we just saw, pre-market trading pointed toward a slightly higher open.

What's Baked into the Earnings Cake?

The concern as we move into earnings season is whether the market is priced for perfection. If that’s the case it could be much harder for companies to surprise to the upside, but easy for them to disappoint on the downside. This may be a theme repeated often this earnings season. Most analysts are expecting blockbuster earnings, but if they don’t live up to expectations, that could cause some mental exhaustion. This becomes even more of a risk considering the market is only about 8 percent off of its all-time highs, and much higher than a year ago. There’s concern among some analysts that a certain amount of earnings growth might already be baked into the cake.

However, this does mark the first quarter of earnings with the new tax law in effect, so we might get our first glimpse of its actual effects on company profitability, and today we’ll likely hear what bank executives have to say about it.

Earnings season begins with a major rise in expectations for one of the most robust earnings years that many have ever seen, though the proof will be in the actual numbers. The year began with analysts projecting about a 9 percent rise in overall Q1 S&P 500 earnings. That’s now risen to 16 percent. Remember, earnings drive the markets. There have been lots of bumps in the road this year and may continue to be, but the solid underpinning could be company results.

Other Sectors in the News

Before all the earnings excitement this morning, the market put in a solid performance Thursday. Normally, bullish traders like to see strength in sectors like tech, industrials, financials, and materials, and they got all that during Thursday’s session. It also tends to be a promising sign when volatility flags a bit, yields rise in the interest rate complex, and so-called “defensive sectors” like utilities fall. Check. It all happened Thursday.

Typically you also tend to see sectors like health care and telecom perform a bit less well during an up day, but that wasn’t the case Thursday as both of those sectors seemed to get a lift from talk of mergers and acquisitions (M&A). It looks like the overall market upside may have a chance to be better these days because of that extra element.

FIGURE 1: BREAKING THE CHANNEL? The volatility in the S&P 500 (SPX) over the past several sessions has been within a range bound roughly by the 200-day moving average to the downside, and 2670, a spot seen as resistance by many chart watchers. Robust earnings from the financial sector may have provided the impetus to push through to the upside. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Pick Up The Phone

Even long-term investors might want to consider listening to some of the conference calls this quarter. Not everyone is a conference call junkie, but it can pay to at least have some sense of what company leaders say as the earnings season moves along. The big bank CEOs’ observations about potential tariffs and geopolitical turmoil and how these factors might affect both their own businesses and the businesses of clients are key. Hopefully at least one of the three bank CEOs today addresses the tariff issue.

If you can’t jump on the actual call (they tend to happen when many people are at work, after all), many companies do release call transcripts or replays on their Investor Relations sites within a day or two, and there’s nothing wrong with getting the information a little later if you’re in the market for the long term and don’t need to trade immediately on the information. The Q&A parts, where analysts sometimes ask challenging questions, are often the most revealing sections, so feel free to scroll down.

“Show Me” Time For Financials

Last year, financials were right near the top of the sector leader board. This year, like a lot of sectors, they’re in the red. As of the end of the day Thursday and just ahead of big-bank reporting season, financials were down slightly year-to-date. When you think about it, the financial sector retreat seems a bit surprising, especially considering that the Fed remains in a hiking cycle (higher rates tend to help banks), M&A activity is high, and the economy continues to grow near 3 percent. Maybe investors are in a “show-me” mode with financials, waiting for the big banks to prove once again they’re performing well. The sector is expected to deliver better than 20 percent year-over-year earnings growth in Q1, according to S&P Global Market Intelligence, so with today marking the start of big bank earnings, perhaps “show me” time has arrived..

Waiting For Guidance

It’s easy to get excited about the projected double-digit Q1 earnings growth many analysts forecast for S&P 500 companies, but remember not to get too caught up in past performance. The future also matters, and positive company guidance remains among the gold standards of a successful earnings report. Not every analyst is certain that S&P 500 company guidance will be as lofty as in past quarters. “We worry that market turmoil and recent trade tensions could result in tempered Q2 guidance from corporate management teams as they may delay capital deployment plans,” warned analyst Lindsey Bell of research firm CFRA, in a note to investors Thursday.

So if a company beats Wall Street’s quarterly estimates but the shares start going down, it might be a sign that guidance disappointed. It’s something to keep a close eye on as reporting season begins in earnest, especially as rising wages and energy costs might be starting to eat into some company’s profits. Delta (DAL), for instance, beat on revenue when its earnings were released yesterday, but earnings came in roughly in line, due in part to these metrics, the company said. That said, DAL stock rose nearly 3 percent Thursday.

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