For all intents and purposes second quarter earnings season kicks off on Friday. Yes, PepsiCo (PEP) does report on Tuesday and Delta Air Lines speaks on Thursday, but the real bellwether earnings reports come from the big banks on Friday with earnings from Citigroup (C), Wells Fargo (WFC) and JPMorgan Chase (JPM).
Bank earnings will answer some important questions about bank earnings, of course. We’ll get to see if warnings from the banks themselves and cuts in earnings estimates from Wall Street analysts based on a projected slowdown in trading revenue have been justified, for example. We’ll get to see if loan demand is as tepid as some fear. And banks will tell investors more about their plans for increasing dividends now that the Federal Reserve has given them a passing grade on their latest stress tests.
But bank earnings and the market’s reaction to them will also tell investors and traders about the trends in market reaction to earnings for the rest the seasons’s earnings. The big question in my mind is whether the markets will reward stocks for earnings that are at or just slightly above expectations or will they punish stocks that don’y deliver big surprises to the upside after the huge move higher in stock prices in 2017.
Bank stocks are a useful test case because 1) bank stocks have rallied strongly recently on earnings and dividend expectations, and 2) Wall Street analysts have been busy reducing their forecasts for second quarter earnings. It won’t take much for bank stocks to beat these lowered estimates, but will a modest beat be enough in this market?
For example, analysts have lowered their estimates for second quarter earnings at Citigroup by 8% from forecasts at the beginning of 2017. The consensus projection now calls for earnings of $1.22 a share, down slightly from the $1.24 earned by the bank in the second quarter of 2016.
Projections at JPMorgan Chase and Wells Fargo aren’t a whole lot more optimistic right now. The consensus on JPMorgan Chase calls for earnings of $1.60 a share, up from $1.55 in the second quarter of 2016. At Wells Fargo analysts are looking for $1.02 a share, a penny more than last year.
The big earnings growth story is, according to Wall Street projections, at Bank of America where the consensus is looking for 19% year over year growth. But Bank of America doesn’t report earnings until Tuesday, July 18.
Finally, bank earnings will also shed some light on how much current quarter earnings matter at all right now. With dividend increases dancing like sugar plums and higher interest rates likely to add to bank revenue in the second half, are investors and traders going to react with much emotion at all to this quarter’s earnings?
That’s an important question as well for technology stocks such as Apple (AAPL), Amazon (AMZN), and Facebook (FB) that report later in the month.