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Analyzing Positive Bank Earnings: Navigating an Uncertain Outlook

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Analyzing Positive Bank Earnings: Navigating an Uncertain Outlook

The latest quarterly releases from JPMorgan, Citigroup, and Wells Fargo have been well received by the market. These results showcase the resilience of the economy, as credit demand remains positive and higher interest rates allow banks to charge more for loans. However, there are still concerns about the potential impact of an economic downturn on bank profitability.

While the banking giants like JPMorgan, Citigroup, and Wells Fargo are considered safe and regularly undergo stress tests, smaller regional banks have been under scrutiny. These banks will begin reporting their results soon, and their performance will be closely watched.

It’s worth noting that even though JPMorgan and its peers were not directly affected by the recent banking issues, they have faced some challenges. These include the need to offer higher rates to depositors, which puts pressure on their net interest margins. While their Q3 net interest margins were still up compared to the previous year, there has been a leveling off relative to the preceding quarter.

The investment banking business has been weak for several quarters due to tighter monetary policy and other macroeconomic headwinds. While there are some positive signs on the horizon for M&A and IPO activities, significant improvements are not expected until the broader economic conditions improve.

Bank Stocks Under Scrutiny

Bank stocks have underperformed the broader market, particularly since concerns about regional banks emerged earlier this year. The ongoing worry is how bank profitability will fare during an economic slowdown. Investors have noticed that banks tend to make a lot of money during good times, only to give it back during bad times. The key question now is how severe the next economic downturn will be and how it will impact bank earnings.

In terms of the overall finance sector scorecard, we have seen positive results from 19.2% of the sector’s market capitalization in the S&P 500 index. Earnings for these companies were up 21.9% year-over-year, with revenues up 13.6%. This is a strong performance, with 100% of companies beating EPS estimates and 66.67% beating revenue estimates.

Looking ahead, total Q3 earnings for the finance sector are expected to be up 9.5% with 2.4% higher revenues.

Earnings Outlook and Growth Expectations

It’s important to look beyond the current earnings reports and consider the overall earnings picture. Looking to 2023 Q3, there is an expectation of a decline in S&P 500 earnings by 1.3% compared to the previous year, with a slight increase in revenues. The chart below illustrates the historical and projected earnings and revenue growth rates.

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Image Source: Zacks Investment Research

2023 Q3 is expected to be the final quarter of declining earnings for the S&P 500 index, with positive growth anticipated from 2023 Q4 onwards. Notably, if it weren’t for the drag from the Energy sector, Q3 earnings growth would already be positive.

Additionally, excluding the Energy sector, net margins are expected to be modestly up compared to the previous year. The Tech sector, in particular, has made significant progress in improving margins. The chart below highlights the positive trend in the Tech sector’s net margins.

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Image Source: Zacks Investment Research

It’s crucial to consider expectations for next year and beyond, as these can inform the disconnect between current earnings estimates and concerns about an impending economic downturn. Economic analysts have been gradually lowering their recessionary odds in recent months.

Upcoming Earnings Releases

The reporting cycle will kick into high gear this week, with nearly 150 companies, including 54 S&P 500 members, reporting Q3 results. Already, we have seen positive results from 32 S&P 500 members, with Q3 earnings up 13.5% year-over-year and revenues up 8.8%. The majority of companies have beaten EPS estimates, indicating strong performance.

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Image Source: Zacks Investment Research

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Image Source: Zacks Investment Research

As we continue to navigate the uncertain economic landscape, it’s vital to stay informed about the latest earnings updates and market trends. For a more detailed analysis, including expectations for the coming periods, check out our weekly Earnings Trends report.

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