Big bank earnings arrive on Wednesday and Thursday but, unfortunately, they won’t tell us anything useful about the margin pressures from rising global supply chain shipping costs or higher prices for raw materials.
Those are the factors that could produce a quarter’s worth of warnings and unpleasant surprises once third quarter earnings season starts on October 13. But to learn about the effect of those margin pressures on earnings we’re going to have to wait for reports from the consumer and industrial companies that are on the front lines of these trends.
Banks aren’t. They don’t ship much of anything and they don’t buy much in the way of raw materials. That doesn’t mean that investors won’t learn anything about the state of the U.S. economy when JPMorgan Chase (JPM) and Goldman Sachs (GS) report earnings on October 13, or when Wells Fargo (WFC), Citigroup (C) and Bank of America (BAC) follow with their reports on October 14. Banks have reported solid earnings growth even during the Pandemic Recession on the strength of the revenue produced by their trading units. Lending volumes and lending revenue slowed with the slowdown in the economy. And they haven’t really picked up even as the economy has recovered some of its fizz. So below the top line revenue and earnings performance of these banks, investors will be looking at the figures on loan growth and revenue from that business to see if, finally, businesses feel confident enough to borrow.
Right now it looks like those lending measures are likely to show continued slow lending growth. Loans as a percentage of total assets fell to 47.05% in the week ended September 29 from 47.11% the prior period, according to the Federal Reserve. This came as cash at banks continued to rise with total assets increasing to $22.27 trillion from $22.19 trillion. Much of that cash is going into Treasuries and paper backed by government agencies. The share of safe assets-—virtually riskless investments such as cash, Treasuries, and securities effectively guaranteed by the U.S. government—increased to 51.4% of total assets from 51.2%. Treasury and agency securities were the highest as a percentage of total assets since September 1994
Residential real-estate loans hit a historic low as a percentage of total assets at 10.0%
At the end of last week the analyst consensus earnings per share for these six big bank stocks (against the earnings per share for the third quarter of 2020) was JPMorgan Chase $2.99 consensus projection versus $2.92 actual for the third quarter of 2020, Goldman Sachs $9.70 versus $9.68, Bank of America 70 cents versus 51 cents, Wells Fargo $1.04 versus 56 cents, Citigroup $1.73 versus $1.40, and Morgan Stanley $170 versus $1.59.
We won’t get the rough outline of a picture for the rest of the economy really until we see reports from Walgreens Boots Alliance (WBA) and Alcoa (AA) on October 14.
But we’ll really have to wait until the week after that for a full picot. Procter & Gamble (PG) repots on October 19 and that company should give us insight into inflation and other cost pressure. The big date, though, s October 21 when Intel (INTC), Union Pacific (UNP), Nucor (NUE), Freeport McMoRan Copper & Gold (FCX)m and American Airlines (AAL) report.
I’m putting so much emphasis on third quarter earnings reports because this quarter might break a string of four straight quarters when quarterly earnings guidance rose in the days before actual reports. That ushered in an earnings season that showed rising earnings growth. Right now, with the market struggling with record high valuations, worries about global and U.S. economic growth, and concern over a potential November division by the Federal Reserve to begin reducing its $120 billion a month in purchases of Treasuries and mortgage-backed assets, a reassuring earnings season is what stocks need.
Wall Street analysts are likely to be particularly focused on profit margins this quarter since profitability at S&P 50 companies is near a record high. There aren’t a lot of easy margin improvements out there and there are a lot of threats to margins from rising costs of everything from energy, to labor to raw materials to shopping.
The stakes are high. According to a study by Gina Martin Adams, chief equity strategist at Bloomberg Intelligence, a peak in margin forecasts foreshadowed four of the S&P 500’s largest routs in the last decade, including the one in 2020.
