Thunder From Under
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Chicago, IL – April 11, 2022 – Zacks.com releases list of companies likely to release earnings surprises. This week’s list includes JPMorgan JPM, Bank of America BAC and Goldman Sachs GS.
Can banking stocks regain their mojo with Q1 results?
JP Morgan and his peers such as Bank of America and Goldman Sachs who are on deck to report first quarter results this week had a great run last year. The Zacks Major Banks industry, which includes JPMorgan and the other money center operators, rose +32% in 2021, better than JPMorgan’s +24.6% gain and the S&P index’s +27.5% 500.
You can see in the chart that while JPM stocks were second in performance last year, they still outperformed the Zacks Tech sector.
This boost in performance made perfect sense. Yes, there were supply chain bottlenecks and rampant concerns about inflation, but it was all down to a scorching economy that pushed trading and investment banking volumes into territory. record high and raised optimism about loan demand.
More importantly, interest rates were expected to rise, which directly benefited banking stocks through improved margins. Indirectly, the upcoming round of Fed tightening has benefited banking stocks by undermining the appeal of high-multiple, long-duration tech stocks that are generally seen as less attractive in a rising interest rate environment.
What went wrong for bank stocks?
This performance picture has changed significantly since the start of the year, with bank stocks lagging significantly behind the broader market.
We have entered the “post-transitional” phase with respect to the Fed’s inflation outlook which has caused a spike in long-term interest rates. This should have been a catalyst for bank stocks if short-term interest rates had not also risen in parallel, causing the yield curve to flatten and even momentarily invert.
I won’t repeat why yield curve inversions are scary things and why it’s useful for all of us to keep a close eye on the risk of such a move. But I want to stress here that I am sympathetic to the idea that the current yield curve and its signaling power on future economic growth may not be entirely comparable to historical periods due to the Fed’s extraordinary QE policies since the global financial crisis. .
Regardless of this plausible but otherwise minority view of yield inversion, they are a net negative for growth prospects. This, combined with high oil prices and geopolitical uncertainty resulting from the war in Ukraine, seems to be weighing on banking stocks lately.
As is usually the case, the shift in sentiment toward banks has likely gone overboard as the economy remains strong even as recession risks have risen from very depressed levels.
The group’s short-term profitability is undoubtedly mixed, with increased uncertainty weighing on the investment banking deal flow (M&A and underwriting) and trading volumes facing very difficult comparisons. But management teams say deal pipelines remain strong, suggesting volumes will pick up quickly as the macro environment eases.
We believe bank stocks are currently attractively positioned based on valuations as well.
As you can see, the group is currently trading at 55% of the S&P 500 multiple, which compares to a 5-year high of 60%, a low of 48% and a median of 60%.
Bank profit expectations
For the Zacks Major Banks segment, which includes these big banks and accounts for about 45% of financial sector earnings, first-quarter 2022 earnings are expected to fall -36.2% on revenue down -1.4%. This would follow profit growth of +8.8% on revenue up +6% in the fourth quarter of 2021.
For the finance sector as a whole, total Q1 earnings are expected to decline -19.2% on revenue up +1.9%.
It will be interesting to read management’s comments on trends in core banking, particularly loan demand. The group’s first-quarter results are expected to show an acceleration in loan growth, but concern will center on sustainability given the aforementioned flattening of the yield curve. Most of the big banks don’t have much exposure to Russia, unlike Citigroup. Management’s outlook for the yield curve will also be instructive.
The scoreboard for the first quarter 2022 earnings season
The first quarter earnings season will really kick off with the big banks this week releasing March quarter results, but the first reports are already out.
As noted earlier, not all businesses have fiscal periods that correspond to calendar quarters. Last-day quarterly reports from companies with fiscal quarters ending in February will be part of the first-quarter tally. We have already seen such results from 20 S&P 500 members, including FedEx, Nike, Oracle and others.
For the 20 index members that have already released Q1 results, total revenue is up +20.7% compared to the same period last year with revenue up +12.3 %, with 80% overshooting EPS estimates and 85% over revenue estimates.
Not to do too much with these very early results, but the comparison charts below put the Q1 2022 earnings and revenue growth rates for these 20 index members into the context of what we had seen the same group of companies in other recent times.
Looking at the first quarter as a whole, with actuals for these 20 index members and estimates for upcoming companies, total earnings are expected to be up +3.5% on revenue in increase of +10%.
Excluding the -19.2% decline in financial sector profits, the index’s growth rate improves to +10.5%. On the other hand, the Energy sector has a very robust earnings profile at present, the sector is expected to generate +204.1% additional earnings compared to the prior year period on revenue in increase of +36.8%. Excluding the strong contribution from the energy sector, earnings for the rest of the index would be down -1.8% on revenues up +8%.
For a detailed look at the overall earnings picture, including expectations for future periods, please see our weekly earnings trends report >>>>Are earnings estimates falling?
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