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Zacks Earnings Trends Highlights: JPMorgan, Wells Fargo and Citigroup

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For Immediate Release

Chicago, IL – January 9, 2020 – Zacks Director of Research Sheraz Mian says, “A positive Finance sector (+7.5% earnings growth on +6.3% revenue growth) is a big help to the aggregate growth picture for the index. Excluding Finance, total Q4 earnings for the rest of the S&P 500 index would be down 6.3%.”

Q4 Earnings Season Gets Underway

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>>>

Here are the key points:

  • We did not see much earnings growth in the first three quarters of the year, primarily reflecting tough comparisons to last year, and this trend is expected to continue in the last quarter of the year as well.
  • Total earnings or aggregate net income for the S&P 500 index are expected to be down -3.7% in Q4 from the same period last year on +3.4% higher revenues, with the Energy sector as a big drag on growth.
  • Energy sector earnings are expected to be down -42.1% from the same period last year on -4.6% lower revenues. Excluding the Energy sector, total earnings for the index would be down only -1%.
  • Sectors with weak growth in Q4, besides Energy, include Autos (-56.5%), Basic Materials (-23.1%), Aerospace (-18.5%), Industrial Products (-5.0%), Retails (-6.8%), Tech (-4.4%), and Transportation (-4.8%). Q4 earnings are expected to be below the year-earlier level for 10 of the 16 Zacks sectors. 
  • Sectors with positive earnings growth in Q4 include Utilities (+17.9%), Business Services (+9.6%), Finance (+7.5%), and Medical (+3.5%).
  • Positive Finance sector (+7.5% earnings growth on +6.3% revenue growth) is a big help to the aggregate growth picture for the index. Excluding Finance, total Q4 earnings for the rest of the S&P 500 index would be down -6.3%.
  • The Finance sector’s favorable growth picture in Q4 is solely because of easy comparisons in the insurance industry, with earnings for the industry expected to be up +36.4%. Excluding the Insurance industry, the Finance sector’s Q4 earnings growth drops to -7.6% (+7.5% with Insurance). 
  • Estimates for Q4 have come down since the quarter got underway, with the current -3.7% decline down from +1.1% at the start of October. This magnitude of negative revisions compares favorably to other recent periods.
  • We have seen Q4 results from 19 S&P 500 members already (these companies have fiscal quarters ending in November). Total earnings for these 19 index members that have reported already are down -19.1% from the year-earlier level on +2.5% higher revenues, with 78.9% beating EPS estimates and 68.4% beating revenue estimates.
  • While Q4 earnings growth is below what we have seen for this group of 19 companies in other recent periods, revenue growth was only modestly below what this same group achieved in the preceding period. The proportion of these companies beating EPS and revenue estimates was within the historical range, though revenue beats were on the lower side.
  • For the small-cap S&P 600 index, total Q4 earnings are expected to be down -3.7% from the same period last year on +0.7% higher revenues, with strong growth in the Finance sector helping offset the Energy sector drag.
  • Excluding the Finance sector, S&P 600 earnings would be down -22.3% in Q4. But had it not been for the Energy sector drag, Q4 earnings would be down only -1.9%. 
  • Total 2019 earnings or aggregate net income for the S&P 500 index are expected to be down -1.7% on +2.7% higher revenues, which would follow the +23.2% earnings growth on +9.2% higher revenues in 2018. Growth is expected to resume in 2020, with earnings growth of +7.9% on +4.0% higher revenues.
  • The implied ‘EPS’ for the index, calculated using current 2019 P/E of 20.4X and index close, as of January 7th, is $159.04. Using the same methodology, the index ‘EPS’ works out to $171.68 for 2020 (P/E of 18.9X). The multiples for 2019 and 2020 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.
  • Worries about the duration of the current economic cycle are not reflected in consensus earnings estimates for next year and beyond, with the 2019 growth challenge primarily a function of tough comparisons to last year’s tax-cut driven record earnings.

Finance Sector in Focus

Banks will be in the spotlight in the coming days as JPMorgan (JPM - Free Report) , Wells Fargo (WFC - Free Report) and Citigroup (C - Free Report) kick-off the Q4 earnings season for the Finance sector. Bank earnings were essentially flat in the first three quarters of 2019 and the Q4 numbers are unlikely be different in any meaningful way.

Expectations ahead of these results show an earnings decline of -9.8% for the Major Banks industry, which would follow the -0.6% decline in the preceding period. The Major Banks industry, which includes JPMorgan, Citi and Wells Fargo, accounts for almost 45% of the Finance sector’s total earnings.

Unlike the Major Banks industry, the growth picture for the broader Finance sector as a whole is reasonably good, with total Finance sector earnings in Q4 expected be up +7.5% from the same period last year on +6.3% higher revenues.

Driving the Finance sector’s positive growth pace is the Insurance industry, which is benefiting from easy comparisons to the year-earlier period. Had it not been for the expected +36.2% earnings growth for the Insurance industry, total Finance sector earnings would actually be down -7.6% (the insurance industry brings in almost a quarter of the total Finance sector earnings).   

Expectations for the Quarter

The earnings growth trend established in the first three quarters of the year is not expected to change in the last quarter of the year, with tough comparisons to the year-earlier period weighing on growth.

For Q4, total earnings for the S&P 500 index are currently expected to be down -3.7% on +3.4% higher revenues, with 10 of the 16 Zacks sectors expected to have lower earnings relative to the year-earlier period.

As has been the trend in other recent periods, Q4 estimates came down as the quarter got underway.

The magnitude of negative revisions to Q4 estimates is in-line with historical trends. In fact, a big reason for the market’s favorable reaction to Q3 results was the absence of across-the-board negative guidance that many in the market appeared to fear ahead of the start of that earnings season.

Driving this fear was the negative impact of the trade issue on business confidence and growing signs of economic weakness in key regions of the world, including the domestic factory space.

Earnings growth was essentially flat in the first two quarters of the year, fell -1.7% in Q3, and is expected to be down -3.7% in Q4. This is expected to change as turn the page on 2019 given the tough comparisons to tax-boosted earnings in 2018, with growth resuming in 2020 Q1, as the above chart shows. 

The market appears to have accepted the deceleration in growth this year in the hope that growth resumes from next year onwards.

The key issue will be if expectations for next year remain stable or start coming down as we move through the remainder of the year. Analysts have not made any significant revisions to their estimates in response to the ongoing trade dispute, likely in the hope that the issue will eventually get resolved. This, coupled with the ongoing economic weakness in Europe, China and elsewhere likely represent downside risks to the growth outlook. 

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