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Positive Start to Earnings Season

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Wednesday, January 15, 2014

The strong Bank of America (BAC - Free Report) earnings report and the World Bank’s growth upgrade provide the backdrop for today’s trading action. We will also likely see further follow-through to Tuesday’s favorable U.S. retail sales numbers that eased concerns raised by the earlier soft jobs report.

The World Bank raised its global GDP growth forecast for 2014 from +3% to +3.2%, with growth in the U.S., Japan and Europe offsetting loss of momentum in emerging markets like China, India and Brazil. If realized, this would be the strongest growth pace for the global economy since 2010 and would represent a material acceleration from last year’s estimated +2.4% growth rate.

A key downside risk to the growth outlook reflects the impact of the Fed’s Taper on emerging market capital flows. A faster rise in long-term interest rates as a result of the Fed’s stimulus unwind could cut emerging market capital flows by half or more, according the to the Bank. Such a scenario would be particularly problematic for the more vulnerable economies like Turkey, Thailand, South Africa and others.
On the earnings front, Bank of America shares are up sharply in pre-open after its better than expected top- and bottom-line results, with the company reporting steady gains in its commercial and investment banking businesses. While Bank of America has had to face even more regulatory and litigation issues than J.P. Morgan (JPM - Free Report) and some of those still need to be addressed, there is a sense that the bank may finally getting past problems.

Unlike J.P. Morgan and Wells Fargo (WFC - Free Report) , Bank of America remains a expense control story. Even though expenses were on the high side in Q4, the bank appears on track to meet its long-term goal, articulated in 2011, to squeeze out $8 billion annually from its cost base. Being the more domestic centric relative to J.P. Morgan and Citigroup (C - Free Report) ), Bank of America stands to benefit from the expected upturn in the U.S. economic growth in 2014 and beyond.

Citigroup will be releasing results tomorrow, but with Q4 results from Bank of America, J.P. Morgan, and Wells Fargo already out, the Finance sector is off to a great start this reporting cycle. Total Q4 earnings for these 3 big banks, which combined account for more than a quarter of the sector’s total earnings, are up +28% from the same period last year on essentially flat revenues. Easy comparisons for Bank of America account for most of the year-over-year growth.

The composite Q4 earnings growth rate for the sector, combining the results from these 3 banks with expectations for those still to report results, has moved up to +23.7%. The Finance sector is a big driver of the expected +6.9% total earnings growth for the S&P 500 as a whole in Q4. Excluding Finance, Q4 earnings growth for the S&P 500 drops to +3.4%.

Sheraz Mian
Director of Research

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