Just want to make sure that no one missed the sell recommendations in yesterday’s Saturday Night Quarterback post on my subscription JubakAM.com site.
Big banks will kick off another earnings season beginning with JPMorgan Chase (JPM) on Wednesday, April 13.
Citigroup (C) and Wells Fargo (WFC) follow on April 14. Bank of America (BAC) reports on April 18.
Bank earnings forecasts present a complicated picture for the quarter–which is only appropriate since that’s true of Standard & Poor’s 500 earnings forecasts as a whole.
Take JPMorgan Chase, for example. The Wall Street consensus calls for earnings of just $2.71 a share. That would be a huge drop from the $4.50 a share reported in the first quarter of 2021. Yet despite this dismal forecast, shares of JPMorgan Chase have climbed 4.82% in the last month as earnings report date has approached. (The stock is still down 14.44% for 2022 as a whole at the close on Friday, April 8.)
The market seems to be expecting this bank stock to pull higher than forecast earnings out of its hat. Which isn’t a totally unreasonable hope. In 2021 the bank reported earnings surprises of 25% in the third quarter, 22% in the second quarter and 48% in the first quarter. Of course, the fourth quarter surprise fell back to 12%. A repeat of that kind of modest surprise might well count as a negative outcome for the quarter, but looking at the 2021 record, you can see why there is hope for a huge surprise in the first quarter 2022 earnings to be reported on April 13.
Of course, 2022 isn’t 2021 when revenue and earnings growth soared on the recovery from depressed figures from the Pandemic.
But Wall Street does have bit of history on its side: Bank stocks tend to out perform in the first three months after the start of a cycle of higher interest rates. That cycle started with the March move to raise interest rates by the Federal Reserve, so we’re just moving into what history says is a sweet spot for banks. (Banks make more money when interest rates go up since they borrow in the short-term market and lend in the long term market where interest rates move up most strongly after the Fed starts raising its short-term benchmark rates.)
On the other hand, weighing against bank stocks is inflation near 8%–which puts pressure on bank costs. This time around too banks seem to be engaged in a bidding war to keep talent. In this tight job market banks, like other companies can’t afford to let employees walk so they’ve been raising compensation. Costs looked like they were headed higher anyway so this trend in compensation doesn’t come at a good time.
A wider view from JPMorgan Chase shows a similar situation at other bank stocks.
Citigroup, for example, is forecast to report $1.98 versus $3.62 a share for the first quarter of 2021. The bank showed a 5% earnings surprise when it reported fourth quarter 2021 earnings. Before that the surprises were 30% for the third quarter of 2021, 46% for the second quarter and 41% for the first quarter 2021.
The bank’s stock is down 14.9% year to date and down 7.27% in the last month.
Wells Fargo is forecast to report 83 cents a share for the first quarter 2022 versus $1.05 in the first quarter 2021. The bank showed a bigger-than-its-peers surprise of 27% in the fourth quarter of 2021 after a 14% surprise in the third quarter, 45% in the second quarter and 52% in the first quarter of 2021.
The stock is up 2.08% for 2022 to date and up 4.89% in the last month.
Bank of America is forecast to to report 77 cents a share for the first quarter of 2022 versus 86 cents a share for the first quarter of 2021. The bank showed a typical-for-the-sector surprise of 8% in the fourth quarter of 2021 after a surprise of 20% in the third quarter, 34% in the second quarter and 32% in the first quarter.
The stock is down 10.36% for 2022 to date and up 2.80% in the last month.
I have exposure to bank stocks in my online portfolios with a position in Wells Fargo in my Jubak Picks Portfolio (down 13.14% from the January 12, 2022 initiation date), a position in Citigroup in my Dividend Portfolio (down 12.47% since my December 8, 2020 picks), a position in USBancorp (USB own 5.41% since my March 19, 2021 pick) and with positions in the Invesco KBW Bank ETF in my Jubak Picks Portfolio (up 2.46% from my March 6, 2021 pick) and my Perfect 5 ETF Portfolio (up 2.46% from March 4, 2021 pick for that portfolio.)
On Monday, April 11, just ahead of bank earnings, I’m going to sell the Invesco KBW Bank ETF out of my Jubak Pick Portfolio. I will sell that position out of my Perfect ETF Portfolio on my subscription JubakAM.Com site in a separate post later that day since I need to replace that ETF in this portfolio with another pick at the time of that sell. I will also sell my position in Wells Fargo out of Jubak’s Picks ahead of earnings. The Friday announcement that New York City will not open any new accounts with Wells Fargo after an investigation by Bloomberg found evidence of racial discrimination in the bank’s mortgage financing business is a reminder of how much work the bank needs to do to clean up its operational mess. I don’t want to own these shares if the bank has to do big housekeeping during a recession (or fails to make the needed changes because of the recession.) I will hold my position in Citigroup in my Dividend Portfolio since the stock doesn’t go ex-dividend for this quarter’s payment until April 29. I will also hold USBancorp for its April 14 earnings report. I think the bank’s fee-generating businesses give it substantial protection in a recession. And I don’t want to be completely out of the bank sector at the start of a cycle of interest rate increases.
Let me finish this look at earnings season with a comment or two on the S&P 500 earnings picture as a whole. The Wall Street consensus isn’t looking for a great first quarter for earnings. Yardeni Research calculates the consensus as looking for 4.9% year over year earnings growth for the S&P 500 in the quarter. FactSet puts the consensus at 4.5% growth year over year and notes that the forecast is down from 5.7% earnings growth projected for the quarter on December 31.
My sense of the market right now is that investors and traders are hoping for a substantial earnings surprise in the quarter.
The earnings picture for the rest of 2022 isn’t much brighter. The consensus, Yardeni calculates, is 6% year over year earnings growth for the S&P in the second quarter, an increase to 9.9% growth in the third quarter, and to 12.4% year over year growth in the fourth quarter. For the entire year that works out of 9.1% growth in 2022 from 2021.
You’ll note that these Wall Street forecasts don’t seem to allow for an economic slowdown, let alone a recession, in 2022.
