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Solid Start to Q4 Earnings Season

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The big banks have given us a strong start to the Q4 earnings season, going some way towards justifying these stocks’ recent momentum, particularly following the election.

A big part of the recent gains for stocks like JPMorgan (JPM - Free Report) : up +23.1% since November 8th), Bank of America (BAC - Free Report) : up +34.8% in that time period) and others reflect market participants’ hopes that the incoming administration will roll back all or most of the regulatory constraints, implement tax reform, and give the U.S. economy’s growth trajectory a positive nudge. But the more tangible catalyst for bank earnings, particularly this earnings season, has been the post-election uptrend in interest rates.

We didn’t really see the full impact of higher interest rates on the banks’ net interest margins in Q4 results. But higher interest rates, increased confidence and the resultant enhanced appetite for risks did juice JPMorgan and Bank of America’s trading revenues. JPMorgan’s trading revenues were up +24% from the year-earlier level, with fixed income trading revenues up +31%. Bank of America showed strong gains in fixed income trading as well, with the bank’s Q4 fixed income trading revenues up +12% from the year-earlier level. This momentum in trading revenues offers favorable read-throughs for Goldman Sachs (GS - Free Report) , which reports next week (Jan. 18th) and has a storied trading franchise. Morgan Stanley (MS - Free Report) , which reports a day ahead of Goldman, has been reducing its trading business over the last many years.

It is still fairly early, with results from only 5 Finance sector companies in the S&P 500 (out of 90 total) out already, but these 5 companies are the some of the largest in the entire index and account for more than a quarter of the sector’s total market capitalization. Total earnings for these 5 Finance sector companies are up +15.6% from the same period last year on +1.4% higher revenues, with all 5 beating EPS estimates but only 2 beating top-line estimates.

This is better earnings growth than we have seen from the same group of 5 banks in other recent periods, which is having a favorable impact on the aggregate Q4 growth expectation for the sector as a whole. Total Q4 earnings for the Finance sector as a whole, combining the reported actuals with the still-to-come estimates, are expected to be up +17.1% from the same period last year. The table below shows the sector’s Q4 earnings growth expectations at the medium-industry level contrasted with estimates for the following four quarters and actual results for the preceding three periods.

Please note that the Major Banks industry, of which JPMorgan, Bank of America and others are part, accounts for roughly 45% of the sector’s total earnings (insurance is the second biggest earnings contributor, accounting for about 25% of the total). The sector’s growth pace for the quarter remains in double-digits even after we adjust for the easy comparisons at AIG (AIG - Free Report) . Excluding AIG, the sector’s Q4 earnings would be up +11.7%.

The sector’s earnings are on track to be flat in 2016. But they were expected to be up materially in 2017 and 2018 even before the aforementioned favorable developments. The chart below shows the sector’s annual earnings growth expectations.

With a number of policy oriented developments still to unfold after the new administration takes office, it is reasonable expect positive revisions to these expectations. And if that is the case, then bank stocks should continue their momentum. Valuations have no doubt caught up with underlying fundamentals, but they are by no means stretched relative to historical periods, particularly given the emerging interest rate trajectory.

Q4 Scorecard (as of Friday, January 13th)

With Q4 results from 29 S&P 500 members already on the books, total earnings are up +11.2% on +3.1% higher revenues, with 69% beating EPS estimates and 44.8% coming ahead of top-line expectations.

The table below provides the current Q4 scorecard

The charts below provide a comparison of the results thus far with what we have seen from this same group of 29 S&P 500 members in other recent periods.

As you can see, the Q4 growth pace, particularly for earnings, is notably tracking above what we had seen from the same group of 29 index members in other recent periods. But positive surprises seem to be hard to come by, with revenue surprises particularly on the weak side. That said, the sample size is still on the small side and will most likely shift as the reporting cycle ramps up this week.

We have 81 companies reporting results this week, including 34 S&P 500 members. The chart below shows the weekly summary reporting calendar for companies in the S&P 500 index.

Q4 Expectations As a Whole

For Q4 as a whole, total earnings for the S&P 500 companies are expected to be up +4.2% from the same period last year on +3.8% higher revenues. This would follow the +3.8% growth in Q3 earnings on +2.3% higher revenues, the first instance of positive earnings growth for the index after five quarters of back-to-back declines. Comparisons for the Energy sector, a big driver of the earnings recession, turn positive in Q4, with the sector’s earnings growth turning positive for the first time after 8 quarters of declines.

The chart below shows that positive earnings growth resumed in 2016 Q3 after 5 quarters of declines, with the growth pace expected to improve in Q4 and ramp up notably in the following quarters.

The table below shows the summary picture Q4 contrasted with what was actually achieved in the preceding quarter.

Note: Sheraz Mian heads the Zacks Equity Research department and is a well-regarded expert of aggregate earnings. He is frequently quoted in the print and electronic media and publishes the weekly Earnings Trends and Earnings Preview reports. If you want an email notification each time Sheraz publishes a new article, please click here>>>

Here is a list of the 81 companies reporting this week, including 34 S&P 500 members.

Company Ticker Current Qtr Year-Ago Qtr Last EPS Surprise % Report Day Time
PROGRESS SOFTWAPRGS0.480.46-11.11%MondayAMC
COMERICA INCCMA0.960.7116.46%TuesdayAMC
MORGAN STANLEYMS0.660.4325.00%TuesdayAMC
Linear TechLLTC0.540.5-1.85%TuesdayAMC
UNITEDHEALTH GPUNH2.071.44.33%TuesdayAMC
SYNOVUS FINL CPSNV0.530.444.00%TuesdayAMC
BANK OZARKSOZRK0.690.5711.86%TuesdayBTO
MERCANTILE BANKMBWM0.460.46.67%TuesdayBTO
AQUA AMER INCWTR0.290.285.13%TuesdayBTO
IHS MARKIT LTDINFO0.360.31-11.76%TuesdayBTO
NEW ORIENTAL EDEDU0.090.04-10.10%TuesdayBTO
CSX CORPCSX0.490.486.67%TuesdayN/A
UNITED CONT HLDUAL1.512.541.97%TuesdayN/A
HANCOCK HLDG COHBHC0.610.191.72%TuesdayN/A
INTERACTIVE BRKIBKR0.340.25-6.25%TuesdayN/A
FULTON FINLFULT0.240.224.35%TuesdayAMC
PINNACLE FIN PTPNFP0.820.69-1.27%TuesdayAMC
RENASANT CORPRNST0.560.553.51%TuesdayAMC
ADTRAN INCADTN0.10.1330.00%TuesdayAMC
Charles SchwabSCHW0.360.253.03%WednesdayAMC
GOLDMAN SACHSGS4.764.6826.42%WednesdayAMC
US BANCORPUSB0.810.790.00%WednesdayAMC
CITIGROUP INCC1.121.067.76%WednesdayAMC
NORTHERN TRUSTNTRS1.130.990.00%WednesdayAMC
FASTENALFAST0.380.39-2.22%WednesdayAMC
TD AMERITRADEAMTD0.410.39-7.89%WednesdayAMC
COMMERCE BANCSHCBSH0.680.6-2.86%WednesdayAMC
ASML HOLDING NVASML1.060.74-2.80%WednesdayAMC
Kinder MorganKMI0.180.276.67%WednesdayAMC
NETFLIX INCNFLX0.130.07100.00%WednesdayAMC
CAROLINA FIN CPCARO0.440.3627.03%WednesdayAMC
FNB CORPFNB0.240.220.00%WednesdayAMC
WINTRUST FINLWTFC0.90.712.22%WednesdayAMC
BOSTON PRIV FINBPFH0.210.1510.00%WednesdayAMC
CVB FINLCVBF0.240.27-4.17%WednesdayAMC
EAGLE BCP INCEGBN0.710.657.46%WednesdayAMC
SIMMONS FIRST ASFNC0.830.86-7.06%WednesdayAMC
PTC INCPTC0.150.37-14.29%WednesdayAMC
FULLER(HB) COFUL0.750.69-5.88%WednesdayAMC
SLM CORPSLM0.150.29.09%WednesdayAMC
PLEXUS CORPPLXS0.760.47-16.25%WednesdayAMC
NVE CORPNVEC0.640.5321.43%WednesdayAMC
CDN PAC RLWYCP2.392.05-1.42%WednesdayAMC
CLARCOR INCCLC0.70.744.29%WednesdayAMC
COHEN&STRS INCCNS0.480.37-1.92%WednesdayAMC
NOVOZYMES A/SNVZMYN/A0.336.45%WednesdayAMC
Alaska Air GroupALK1.31.467.32%ThursdayAMC
J B HuntJBHT1.011.01-4.90%ThursdayAMC
BB&T CORPBBT0.730.688.57%ThursdayAMC
KEYCORP NEWKEY0.290.2815.38%ThursdayAMC
BANK OF NY MELLBK0.780.6811.11%ThursdayAMC
PPG INDS INCPPG1.191.230.00%ThursdayAMC
UNION PAC CORPUNP1.331.31-2.16%ThursdayAMC
M&T BANK CORPMTB2.021.654.41%ThursdayAMC
CHECK PT SOFTWCHKP1.151.14.12%ThursdayAMC
WEBSTER FINL CPWBS0.550.561.89%ThursdayAMC
HOME BANCSHARESHOMB0.330.280.00%ThursdayAMC
WNS HLDGS-ADRWNS0.340.42-10.81%ThursdayAMC
GATX CORPGATX1.051.4469.17%ThursdayAMC
MGIC INVSTMT CPMTG0.220.2647.06%ThursdayAMC
KCG HOLDINGSKCG0.08-0.06-385.71%ThursdayAMC
TAL EDUCATN-ADRTALN/A0.12-44.83%ThursdayAMC
AMER EXPRESS COAXP0.991.2329.17%ThursdayAMC
PEOPLES UTD FINPBCT0.240.228.70%ThursdayAMC
SKYWORKS SOLUTNSWKS1.481.483.01%ThursdayAMC
INTL BUS MACHIBM4.914.842.49%ThursdayAMC
ASSOC BANC CORPASB0.320.276.25%ThursdayAMC
PREFERRED BANKPFBC0.660.549.52%ThursdayAMC
FIRST FIN BC-OHFFBC0.370.322.78%ThursdayAMC
ATLASSIAN CP-ATEAM-0.020.04100.00%ThursdayAMC
INDEP BK MASSINDB0.740.744.00%ThursdayAMC
SANDY SPRINGSASR0.540.6414.29%ThursdayAMC
SUNTRUST BKSSTI0.880.912.25%FridayAMC
CITIZENS FIN GPCFG0.520.426.12%FridayAMC
REGIONS FINL CPRF0.220.2114.29%FridayAMC
SCHLUMBERGER LTSLB0.270.6513.64%FridayAMC
KANSAS CITY SOUKSU1.191.23-6.67%FridayAMC
GENL ELECTRICGE0.460.523.23%FridayAMC
SYNCHRONY FINSYF0.670.657.35%FridayAMC
ROCKWELL COLLINCOL1.151.210.64%FridayAMC
AMERIS BANCORPABCB0.560.473.39%FridayAMC