The following is an excerpt from this week's Earnings Trends piece. To access the full article, please click here.
Many expected the New Year to bring in the good times for banks given the improving outlook for their revenues and margins following the start of the Fed’s tightening cycle. Banks went through a long cycle of restructuring and regulatory charges over the last few years even as their profitability was held down by the low interest rate environment. The hope was that the emerging Fed cycle and associated economic improvement will bring out the banks’ true earnings power. Those hopes are still alive, but with long-term treasury yields steadily coming down in the New Year, those expectations remain at risk of downward adjustment in the coming days.
For 2015 Q4, the Finance sector in the S&P 500 index is expected to have earnings growth of +4.3% after the effectively flat growth in the preceding period. This isn’t much growth to brag about, but Finance is one of only three sectors in the index that is expected to have positive earnings growth in Q4. All of the sector’s Q4 growth is coming from the Major Banks industry, which alone accounts for roughly 40% of the sector’s total earnings.
The underlying business dynamic for the major banks hasn’t improved in any meaningful way. In fact, had it not been for easy comparisons at Citigroup (C - Analyst Report) , the industry and sector’s growth would modestly be in the negative. In Q4, the major banks benefited from continued momentum in the corporate advisory business, though debt capital markets activities remains under pressure. The core commercial banking business has benefited from steady improvements in household and commercial lending activities, though the weakness in the industrial and energy spaces remains a drag.
It will be interesting to see the type of set-asides that banks have to make for the ongoing turmoil in the energy sector, whose fortunes have gone down further in the New Year with the renewed downturn in the oil prices.
Expectations for Q4 & Beyond
Total S&P 500 earnings in Q4 are expected to be down -7.8% from the same period last year on -4.7% lower revenues in Q4, with 13 of the 16 Zacks sectors expected to see earnings declines from the year-earlier period. Earnings growth for the index would still be in the negative even if we exclude the Energy sector drag from the aggregate picture.
Estimates came down as the quarter unfolded, in-line with the trend that we have been seeing quarter after quarter for almost three years now. But the magnitude of negative revisions to Q4 earnings estimates was greater than what we saw in the comparable periods for the preceding two quarters.
The chart below shows what has happened to 2015 Q4 earnings estimates for S&P 500 companies since the start of the quarter.
The picture isn’t expected to improve in any meaningful way in the coming quarters either, with 2016 Q1 earnings growth starting to come down already - currently expected to be down -2.1% from the same period last year. But as we have seen in other recent periods, including in Q4, we will likely see those growth expectations further go down in the coming days as companies report Q4 results and provide weak guidance for Q1 and beyond.
The growth picture is expected to improve notably in the second half of the year, with the growth pace accelerating towards the end of the year. Part of the back-half improvement reflects an end to the Energy sector’s drag due to easier comparisons for that sector. But it’s not unusual Wall Street analysts to be optimistic about the outer periods; they start out with a positive tone and start getting realistic only as the period gets nearer. If history is any guide, then we should see those back-half estimate start coming down in the coming months.
To access the full article, please click here.