Back to top

Bank Earnings in the Spotlight

Read MoreHide Full Article

Note: The following is an excerpt from this week’sEarnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Here are the key points:

•    Total Q1 earnings for the S&P 500 index are expected to be up +16% from the same period last year on +7.4% higher revenues, the highest quarterly earnings growth pace in 7 years.
 
•    Earnings growth is expected to be in double-digit territory from the year-earlier level for 11 of the 16 Zacks sectors, including the Technology and Finance sectors. Only two sectors (Autos & Conglomerates) are expected to show earnings declines in Q1.

•    Energy sector earnings are expected to be up +60.1% from the same period last year on +16.1% higher revenues. Excluding the Energy sector, total S&P 500 earnings growth drops from +16.1% to +14.6%.

•    The Finance sector, which dominates the early reporting cycle, is expected to have a very strong showing in Q1 and the coming quarters.   

•    Earnings estimates for Q1 and the following quarters have gone up in a notable way since the quarter got underway, with estimates for 13 of the 16 Zacks sectors going up.

•    In percentage terms, estimates have gone up the most for the Basic Materials, Energy, Construction and Industrial Products sectors. In absolute terms, positive revisions to the Finance and Technology sectors account for more than half of all estimate upgrades since the quarter got underway.

•    This positive revisions trend is the most dramatic change on the earnings scene in recent years; it will be interesting to see if the trend will continue in the coming days as the Q1 earnings season unfolds.

•    For the S&P 600 index, total Q1 earnings are expected to be up +13.4% from the same period last year on +6.9% higher revenues. This would follow +15.2% earnings growth on +7.6% revenue growth in the preceding quarter.

•    For full-year 2018, total earnings for the S&P 500 index are track to be up +17.9% on +5.3% higher revenues, with full-year 2019 earnings and revenues for the index expected to be up +9.4% and +4.3%, respectively.

•    The implied ‘EPS’ for the index, calculated using current 2018 P/E of 17.3X and index close, as of April 11th , is $153.80. Using the same methodology, the index ‘EPS’ works out to $168.30 for 2019 (P/E of 15.7X). The multiples for 2018 and 2019 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.   

The most profound change on the earnings scene lately has been the unusually positive revisions trend for Q1 and the following quarters. The chart below shows how 2018 Q1 earnings growth expectations have evolved since mid-December 2017.

This is a sight that we haven’t seen in a very long time; definitely not in the last 6 years.

The most important factor driving this positive revisions trend is the tax cuts. The rise in oil prices and the impact of higher bond yields on banks’ profitability are some of the other factors.

Estimates have gone up across the board for 13 of the 16 Zacks sectors, with the highest percentage positive revisions for the Basic Materials, Energy, Construction, and Industrials. In absolute terms, the positive revisions to the Finance and Technology sectors account for more than half of all aggregate positive revisions since mid-December 2017.

The Finance sector’s earnings outlook has notably improved as a result of tax cuts, higher interest rates, and generally favorable economic backdrop. The sector is expected to report +19.2% higher earnings on +4.5% higher revenues, which will follow the sector’s flattish performance in the preceding period.

The Major Banks industry, which alone brings in roughly 45% of the sector’s total earnings in the S&P 500 index and which includes JPMorgan (JPM - Free Report) and Wells Fargo (WFC - Free Report) that kick-off the reporting cycle for the industry this week, is expected to have +11.3% earnings growth on +4.8% revenue growth. The combination of improved net interest margins following additional Fed hikes, benign credit trends, and favorable momentum on the capital markets front should help produce solid results in Q1. These favorable trends should remain in place over the coming quarters as well, as reflected in current expectations for the coming quarters.

The group’s stock market performance this year has tracked the S&P 500 index. The Zacks Major Banks industry, which includes the big money-center banks as well as the major regional operators, is down -0.6% in the year-to-date period, roughly in-line with the S&P 500 index’s -0.3% decline.

Better than expected results and favorable management commentary on the earnings calls should give these stocks a big boost. Management’s comments about trends in the underlying businesses like loan demand, margins and credit conditions will be closely watched. Also important will be capital deployment plans, including the outlook for dividend increases following the tax reform.

Expectations Beyond Q1

The chart below contrasts the Q4 earnings growth rate with what was actually achieved in the last 5 quarters and what is expected in the coming three periods.

It will be interesting to see if expectations for the following quarters follow the positive revisions trend we witnessed ahead of the Q1 earnings season or we will go back to negative revisions trend that has been the recurring theme over the last many years.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on Zacks.com and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview. He manages the Zacks Top 10 and Focus List portfolios and writes the Weekly Market Analysis article for Zacks Premium subscribers.

Will You Make a Fortune on the Shift to Electric Cars?

Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.

With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.

It's not the one you think.

See This Ticker Free >>




In-Depth Zacks Research for the Tickers Above


Normally $25 each - click below to receive one report FREE:


Wells Fargo & Company (WFC) - free report >>

JPMorgan Chase & Co. (JPM) - free report >>

Fastenal Company (FAST) - free report >>


More from Zacks Earnings Trends

You May Like