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JPMorgan, Wells Fargo, Citigroup and Bank of America are part of Zacks Earnings Preview

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For Immediate Release

Chicago, IL – October 12, 2020 – Zacks.com releases the list of companies likely to issue earnings surprises. This week’s list includes JPMorgan Chase & Co. (JPM - Free Report) , Wells Fargo & Company (WFC - Free Report) , Citigroup Inc. (C - Free Report) and Bank of America Corporation (BAC - Free Report) .

Are Bank Stocks Cheap or Value Traps?

Stocks in the Zacks Major Banks industry, which includes JPMorgan, Wells Fargo, Citigroup and others that are on deck to report results this week, have only modestly recovered from their March 23rd lows and lag the broader market in a major way. Even within this beleaguered space, Wells Fargo is in a league of its own, with the stock losing further ground for company-specific reasons.

JPMorgan, the undisputed banking leader represented by the blue line in the above chart, has been a laggard since the market’s bottom. Bank of America and Citigroup, also on deck to report results this week, have done better than JPMorgan since March. But that’s only because they fell harder in the sell-off preceding the rebound. All of these major bank stocks are down in excess of -25% in the year-to-date period, with Wells Fargo down roughly double that level, for the seemingly never-ending company-specific saga.

Driving this underperformance is the group’s cyclical exposure, with the demand for credit and other banking services strongly correlated with GDP growth. Low interest rates, which the Fed has reiterated will remain in place for an extended period, weighs on margins and net interest income.

The group also suffers in a cyclical downturn from deterioration in credit conditions that has a direct bearing on the quality of its assets (loan portfolios) as borrowers struggle to service their obligations. Banks are required to add to their reserves for loan losses, with such reserve additions coming out of their quarterly profits. These reserve additions were a big drag on bank profits in the first half of the year, but the pace is expected to slow down in the Q3 reports.

Beyond traditional banking, the outlook for capital markets and investment banking remains favorable, with Q3 trading volumes notably above the year-earlier levels. Activity levels on the advisory side of the business, like M&A and equity/debt underwriting, have continued their strong trend from Q2 onwards.

Total Q3 earnings for the Zacks Major Banks industry, which includes these JPMorgan, Citi, Bank of America and others, are expected to drop -37.9% from the same period last year on -6% lower revenues. This would follow the -68.4% drop in the group’s earnings in Q2.

Please note that the Major Banks industry brought in 31.5% of the Finance sector’s total earnings over the last four quarters.

While the set up for bank earnings remains mixed, with a difficult backdrop for conventional banking activities and favorable conditions for the capital markets space, we see room for positive surprises in the group’s Q3 results. Net interest margins will remain under pressure, but the faster than expected economic recovery likely helped these companies expand their loan portfolios at a pace that the consensus numbers don’t reflect.

It is reasonable to expect these stocks to finally catch a bid as they report favorable Q3 results. Bank stocks are particularly well placed from a valuation standpoint, looking at all conventional valuation metrics. Let’s take a look at the group using JPMorgan as our proxy for the space, a stock that trades at a premium to the group on account of its leadership position.

On a forward 12-month PE basis, JPMorgan shares are currently trading at 58% of the S&P 500 multiple. This compares to a 5-year range of 94% at the high end to a low of 43% at the low end and a median of 66%. On a trailing 12-month tangible book value basis, the stock is currently trading at 1.72X, compared to a 5-year high of 2.45X, low of 1.18X and 5-year median of 1.89X.

I strongly feel that in the current Tech-dominated market, these bank stocks represent some of the best values for investors that have relatively longer holding horizons.

Q3 Earnings Season Ramps Up

While banks dominate this week’s reporting docket, we have a decent number of bellwethers from other sectors as well. In total, we will get Q3 results from 43 companies this week, including 26 S&P 500 members.

With results from 22 S&P 500 members with fiscal quarters ending in August already on the books that we and other data vendors count as part of the Q3 tally, we will have seen 46 results for this earnings season by the end of the week.

The expectation is for total S&P 500 earnings to decline -22% in Q3 from the same period last year -2.9% lower revenues. The earnings outlook has been steadily improving since the start of Q3, as economic and business activities have resumed. While the latest labor market and factory sector readings suggest some deceleration in the recovery, the recovery is nevertheless in place which should sustain the improving earnings trend.

To get a sense of the aforementioned favorable revisions trend, the current $286.2 billion estimate for Q3 earnings is up from $283.6 billion last week.

The annual growth picture approximates to an index ‘EPS’ of $127.39 for 2020, down from $159.95 in 2019 and $158.88 in 2021.

For an in-depth look at the overall earnings picture and expectations for the coming quarters, please check out our weekly Earnings Trends report >>>> Q3 Bank Earnings in the Spotlight Next Week

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