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Ahead of Wall Street

Monday, January 13, 2014

With the jobs reading now behind us, the market can start focusing on the 2013 Q4 earnings season now. The reporting cycle doesn’t really get into high gear till next week, but we have a Finance-heavy list of 51 companies reporting results this week, including 27 S&P 500 members.

The market has made a tepid start to the New Year and will be looking to this earnings season to get its mojo back. Corporate guidance has been overwhelmingly negative in recent quarters, but expectations for this year and next reflect a meaningful improvement in the earnings growth picture. Investors will be looking for validation of the market’s strong gains last year through an improved corporate earnings outlook.

The Finance sector is heavily represented in this week’s reporters, with all of the sector’s big guns like J.P. Morgan (JPM - Analyst Report), Wells Fargo (WFC - Analyst Report), Bank of America (BAC - Analyst Report), Citigroup (C - Analyst Report) ) and Goldman Sachs (GS - Analyst Report) on the reporting docket. J.P. Morgan has been in the news for all the wrong reasons, with regulatory and litigation issues dominating the headlines. The bank’s Q4 earnings report will likely be quite ‘noisy’, but its superior core earnings power should remain intact. Overall earnings for the sector are expected to be strong, with total earnings up +19.4% from the same period last year. Easy comparisons, particularly at Bank of America and the insurance industry, are driving most of the year-over-year growth. Excluding the Finance sector, total Q4 earnings growth for the S&P 500 drops from +6.3% to +3.5%.

Strong year-over-year growth notwithstanding, banks are expected to continue facing net margin pressures as loan growth remains tepid and the mortgage business loses further ground. On the capital markets front, the equity business likely did fairly good in Q4, while the fixed income and currencies side remained under pressure. Morgan Stanley (MS - Analyst Report) has a stronger equities franchise, while Goldman has always been a FICC powerhouse. The expectation is that the tone of forward commentary from the sector will be positive, reflecting a favorable outlook for net interest margins in the wake of Fed Taper, a more stable China, and lower downside risks in Europe.

The focus on the earnings front will be on management guidance for 2014. Companies typically provide guidance only for the following quarter, but they do tend to discuss their outlook for the coming year on the Q4 earnings calls. It will be interesting to see if management teams see any material improvement in the earnings picture this year along the lines of current consensus expectations for 2014. Total earnings are expected to be up +10% in 2014, up from +4.6% growth in 2013, with most of the growth coming in the back half of the year.

Sheraz Mian
Director of Research

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