US Banks Kick-Off Unofficial Earnings Season

The largest banks in the US are scheduled to release their results on Wednesday, setting the stage for a correction or a renewed rally.​

The Fading Rally

Following the re-election of Donald Trump as US President in November, US equities surged due to expectations that the Republican administration would implement more pro-business policies, with small-cap stocks being among the largest beneficiaries. However, the rally has faded since then as high valuations and the Fed's reluctance to ease interest rates amid persistently high inflation have taken their toll. As a result, the DJIA is currently below its election-day level, while the Russell 2000 has entered correction territory. As companies across America prepare to report their financial results, markets will be closely scrutinising the numbers to gauge whether there is reason for optimism about the coming year or if the recent downward trend will continue.

Overall, companies in the S&P 500 are expected to report a 10% increase in profits for the last quarter, setting a relatively high bar for current valuations. The earnings season kicks off with some of the US’ major banks, with investors keen to understand the impact of the Fed's 100 basis point rate cuts over the past year on the economy. Analysts believe that the market could receive some positive news as major banks are expected to report stronger earnings due to increased dealmaking and trading activity in the latter part of last year. That is on top of a steeper yield curve, which is expected to have provided support for the banks. Typically, banks perform better when interest rates are higher, so investors will be particularly interested in any insights into the Fed's future rate path, as well as an assessment of credit quality to determine if Americans are facing increased financial pressure.​

Major Names to Report

The largest bank in the US, JPMorgan, is expected to report earnings of $4.03 per share, a substantial increase from $3.04 per share in the corresponding period last year. This growth is attributed to a projected 7.8% rise in revenues to $41.6 billion. Futures markets indicate a potential 3.2% volatility increase following the earnings release.

Wells Fargo, which operates the largest mortgage network in America, is expected to face challenges due to higher long-term interest rates despite the Fed's cuts last year. The consensus is that the bank will report earnings of $1.35 per share, up from $0.86 per share in the prior year, as revenue is projected to increase by a modest 0.5% to $20.6 billion. Futures imply a volatility of 4.4% after the earnings release.

The prominent investment bank Goldman Sachs is expected to see stronger gains due to increased merger and acquisition activity in the fourth quarter. Its earnings are forecast to surge to $8.35 per share from $5.48 per share in the same period last year, driven by a 10% increase in Revenues to $12.5 billion. Options suggest a volatility of up to 3.9% following the earnings release.

Dow Jones' Double-Bottom Bounce

After an ending wedge pattern to 45000, the Dow Jones corrected over 7% to 41740, albeit a double bottom may have formed now. Further upside past the 43130 and 43375 peaks could act as an early signal of the uptrend resumption, while a break below could open the door to 41200 and eventually the 40000 handle, increasing the chances of a head-and-shoulders formation.

Source: SpreadEx / Wall Street

Key Takeaways

Major banks in the US such as JPMorgan, Wells Fargo and Goldman Sachs are scheduled to report. Following the post-election rally in US stocks, which has faded due to high valuations and persistent inflation, markets will closely scrutinise the earnings to understand whether the correction continues or markets experience a renewed rally. All three banks are expected to report stronger earnings due to increased dealmaking, trading activity and a steeper yield curve. However, Wells Fargo may face challenges from higher long-term interest rates.