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J.P. Morgan, Ford, United, American and Apple are part of Zacks Earnings Preview

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For Immediate Release

Chicago, IL – October 17, 2016 – releases the list of companies likely to issue earnings surprises. This week’s list includes J.P. Morgan (NYSE:(JPM - Free Report) – Free Report), Ford (NYSE:(F - Free Report) – Free Report), United (NYSE:(UAL - Free Report) –Free Report),American (NASDAQ:(AAL - Free Report) –Free Report) and Apple (NASDAQ:(AAPL - Free Report) – Free Report).

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Reassuring Start to Q3 Earnings Season

The big banks have given us a reassuring start to the Q3 reporting cycle. If this trend continues next week when a broad and representative cross section of corporate America is on deck to come out with quarterly results, then we will have a tangible reason to get optimistic about the overall earnings picture.

J.P. Morgan (NYSE:(JPM - Free Report) – Free Report) stayed true to its well-earned reputation for operational excellence, with solid gains in both consumer banking as well as in its capital markets platform. In consumer banking, the core loan portfolio was up a robust +15% from the same period last year on essentially flat net-interest margin. On the investment banking side, J.P. Morgan came out with momentum in both capital markets as well as on the advisory side.

On the markets side, J.P. Morgan’s trading volumes benefited from the post-Brexit surge, which management indicated has continued into Q4 as well. Overall markets revenue was up more than +20%, largely reflecting momentum in fixed income, currencies and commodities. We saw this positive capital markets trend in other bank reports as well, but the issue with them is more about political scrutiny, negative headlines and potential litigation and not earnings, at least not at this stage.

It will be interesting if this positive start from the major banks will continue with the other banks who are reporting this week. Bank earnings continue to be shackled by low interest rates, which have been weighing on the group’s margins. The interest rates question is of course very complicated, as it not only reflects the market’s evolving Fed view, but also the widespread incidence of negative yields in many other developed markets. Current consensus expectations for the group for the coming quarters and beyond reflect a notable improvement in this situation, particularly with respect to margins.

This week’s reporting docket isn’t just about banks and the broader Finance sector, we have more than 240 companies reporting results this week, including 80 S&P 500 members from a cross section of all major sectors. We will have a pretty good sense of how the Q3 earnings season is unfolding by the end of this week.

Q3 Earnings Season Scorecard (as of 10/14/2016)

Including the bank earnings reports, we now have Q3 results from 34 S&P 500 members. Total earnings for these 34 S&P 500 members are up +1.3% from the same period last year on +2.9% higher revenues, with 79.4% beating EPS estimates and 64.7% coming ahead of revenue estimates.

The picture emerging from the above comparison chart would be in-line with our modestly favorable commentary on the Q2 earnings season when we were detecting an ever-so-slight improvement in the growth picture. Earnings growth was in negative territory in Q2 – the 5th quarter in a row of earnings declines for the index – but the pace of declines was nevertheless an improvement over what we had seen in the preceding two quarters. This gave rise to the narrative that the worst was likely behind us now on the growth front and that the picture will steadily be improving going forward.

For the Finance sector, we have Q3 results from only 5 sector members. But these 5 combined account for more than a fifth of the sector’s total market cap in the index. Total earnings for these 5 sector companies (includes J.P. Morgan, Citigroup & Wells Fargo) are up +1.3% from the same period last year on +2.9% higher revenues, with all of them beating EPS and revenue expectations (100% beat %).

This is better performance than we have seen from these banks in a while.

Q3 Expectations As a Whole

The strong results from the major banks has helped improve the overall Q3 growth expectations, with total Q3 earnings for the S&P 500 index now expected to be down -2.2% from the same period last year on +1.5% higher revenues. This would compare to 2016 Q2 earnings growth of -2.8% on +0.2% higher revenues.

Energy still remains the biggest drag on the aggregate growth picture, with Autos and Transportation as the other major growth laggards. Tough comparisons at Ford (NYSE:(F - Free Report) – Free Report) and the air carriers, particularly United (NYSE:(UAL - Free Report) –Free Report) andAmerican (NASDAQ:(AAL - Free Report) – Free Report), explain the growth issues in those two sectors.

For the two biggest sectors, Technology earnings are expected to be down -1.7% on -1.1% lower revenues while Finance earnings are expected to be up +8.5% on +1.4% higher revenues. The Tech decline is solely a function of Apple (NASDAQ:(AAPL - Free Report) – Free Report), which is expected to see earnings decline -20.6% from the same period last year on -9.6% lower revenues. Excluding the Apple drag, the Tech sector’s earnings would be up +3.0%.

Expectations Beyond Q3

The chart below shows current bottom-up consensus earnings expectations for the index in 2016 Q3 and the following four quarters contrasted with actual results in the preceding four quarters. Please note that the columns represent bottom-up earnings totals for each quarter in billions of dollars while the line represents the quarterly growth rates. As you can see, positive growth is expected to resume from Q4 (+5.2%), with the growth pace expected to ramp up meaningfully in the following quarters.

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