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Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>
The JPMorgan (JPM - Free Report) earnings ‘miss’ is hardly an outlier development in the 2022 Q1 reporting cycle. What we are seeing at this admittedly early stage is that while companies are easily beating top-line estimates, they seem to be having a hard time doing the same with consensus EPS estimates.
You can see this in the EPS and revenue beats percentages for the 26 S&P 500 members that have reported Q1 results already.
Image Source: Zacks Investment Research
This could change as we get into the heart of the Q1 earnings season. But if it is an early sign of things to come then it is likely reflective of the collective inability of management teams and analysts to fully grasp the impact of inflation and logistical bottlenecks.
We have already seen plenty of references to these headwinds from the companies that have reported already, including JPMorgan whose Q1 earnings declined -42.1% from the same period last year on -4.8% lower revenues. For the Finance sector as a whole, total Q1 earnings are expected to fall -19.8% on +1.9% higher revenues. `
JPMorgan set aside $1.5 billion as reserves for loan losses, which contrasts with the year-earlier period when earnings benefited from the release of $4.2 billion that had earlier been set aside for Covid-related loan losses. Management pointed out that about a third of the $1.5 billion total is tied to the bank’s Russia exposure, with the remainder accounting for growing recession risks in the wake of the Fed tightening cycle.
It is these reserves that dragged down the profitability of the consumer banking business, even as other key metrics showed an improving outlook. Credit card loans were up +15%, while the overall loan portfolio increased +6%, in a welcome development after two years of sluggish growth.
The bank noted a +29% increase in credit-card spending, with travel and dining-related spending particularly strong. On the flip side, mortgage and auto-loan originations were down, with the former reflecting rising mortgage rates and the latter a function of continued supply-chain issues in the space.
We will be looking for confirmation of this trend in results from Bank of America (BAC - Free Report) and Wells Fargo (WFC - Free Report) , with the Russia exposure likely dominating Citigroup’s results.
On the capital market front, trading volumes are up against last year’s record levels. Trading revenues fell less than expected at -3%, with fixed income down -1% and equities down -7%. The better-than-expected fixed income trading volumes offers favorable read-throughs for Goldman Sachs (GS - Free Report) which has a bigger trading franchise in that asset class.
The table below shows the 2022 Q1 earnings and revenue growth picture for the Finance sector’s constituent industries, contrasted with what was actually achieved in 2021 Q1 and what is currently expected in 2022 Q2.
Image Source: Zacks Investment Research
Looking at Q1 as a whole, total S&P 500 earnings are expected to be up +3.4% on +9.9% higher revenues. This is a significant deceleration from what we have been seeing in the preceding quarters, as you can see in the chart below that provides a big-picture view of earnings on a quarterly basis.
Image Source: Zacks Investment Research
The chart below shows the overall earnings picture on an annual basis, with the growth momentum expected to continue.
Image Source: Zacks Investment Research
Looking at the revisions trend in the aggregate, estimates are still going up, though only modestly so. There are plenty of cross currents once we look at the revisions trend at the granular level, with rising estimates in a few sectors offsetting estimate cuts in others.
Energy sector estimates had been going up as a result of rising oil prices, even before the Ukraine situation and we can see this within all of the major players in the sector. The significant estimate cuts to the Transportation sector, like air carriers and truckers, represent the flip side of what’s happening to the Energy sector estimates.
There is a rising degree of uncertainty about the outlook, being driven by a lack of macroeconomic visibility as reflected in the Treasury yield curve that is at risk of inversion.
The Ukraine situation appears to be exacerbating pre-existing supply-chain issues, which combined with its impact on oil prices, is weighing on the inflation situation in hard-to-predict ways. The evolving earnings revisions trend will reflect this macro backdrop.
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Mixed Start to Q1 Earnings Season
Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>
The JPMorgan (JPM - Free Report) earnings ‘miss’ is hardly an outlier development in the 2022 Q1 reporting cycle. What we are seeing at this admittedly early stage is that while companies are easily beating top-line estimates, they seem to be having a hard time doing the same with consensus EPS estimates.
You can see this in the EPS and revenue beats percentages for the 26 S&P 500 members that have reported Q1 results already.
Image Source: Zacks Investment Research
This could change as we get into the heart of the Q1 earnings season. But if it is an early sign of things to come then it is likely reflective of the collective inability of management teams and analysts to fully grasp the impact of inflation and logistical bottlenecks.
We have already seen plenty of references to these headwinds from the companies that have reported already, including JPMorgan whose Q1 earnings declined -42.1% from the same period last year on -4.8% lower revenues. For the Finance sector as a whole, total Q1 earnings are expected to fall -19.8% on +1.9% higher revenues. `
JPMorgan set aside $1.5 billion as reserves for loan losses, which contrasts with the year-earlier period when earnings benefited from the release of $4.2 billion that had earlier been set aside for Covid-related loan losses. Management pointed out that about a third of the $1.5 billion total is tied to the bank’s Russia exposure, with the remainder accounting for growing recession risks in the wake of the Fed tightening cycle.
It is these reserves that dragged down the profitability of the consumer banking business, even as other key metrics showed an improving outlook. Credit card loans were up +15%, while the overall loan portfolio increased +6%, in a welcome development after two years of sluggish growth.
The bank noted a +29% increase in credit-card spending, with travel and dining-related spending particularly strong. On the flip side, mortgage and auto-loan originations were down, with the former reflecting rising mortgage rates and the latter a function of continued supply-chain issues in the space.
We will be looking for confirmation of this trend in results from Bank of America (BAC - Free Report) and Wells Fargo (WFC - Free Report) , with the Russia exposure likely dominating Citigroup’s results.
On the capital market front, trading volumes are up against last year’s record levels. Trading revenues fell less than expected at -3%, with fixed income down -1% and equities down -7%. The better-than-expected fixed income trading volumes offers favorable read-throughs for Goldman Sachs (GS - Free Report) which has a bigger trading franchise in that asset class.
The table below shows the 2022 Q1 earnings and revenue growth picture for the Finance sector’s constituent industries, contrasted with what was actually achieved in 2021 Q1 and what is currently expected in 2022 Q2.
Image Source: Zacks Investment Research
Looking at Q1 as a whole, total S&P 500 earnings are expected to be up +3.4% on +9.9% higher revenues. This is a significant deceleration from what we have been seeing in the preceding quarters, as you can see in the chart below that provides a big-picture view of earnings on a quarterly basis.
Image Source: Zacks Investment Research
The chart below shows the overall earnings picture on an annual basis, with the growth momentum expected to continue.
Image Source: Zacks Investment Research
Looking at the revisions trend in the aggregate, estimates are still going up, though only modestly so. There are plenty of cross currents once we look at the revisions trend at the granular level, with rising estimates in a few sectors offsetting estimate cuts in others.
Energy sector estimates had been going up as a result of rising oil prices, even before the Ukraine situation and we can see this within all of the major players in the sector. The significant estimate cuts to the Transportation sector, like air carriers and truckers, represent the flip side of what’s happening to the Energy sector estimates.
There is a rising degree of uncertainty about the outlook, being driven by a lack of macroeconomic visibility as reflected in the Treasury yield curve that is at risk of inversion.
The Ukraine situation appears to be exacerbating pre-existing supply-chain issues, which combined with its impact on oil prices, is weighing on the inflation situation in hard-to-predict ways. The evolving earnings revisions trend will reflect this macro backdrop.