After a big build-up and a near-50% rally in the US bank sector index from its April low, the second-quarter earnings season has been something of a damp squib.
Granted most banks beat forecasts, but there was none of the usual buying frenzy.
First out of the gate, as always, was Wall Street giant JPMorgan Chase (JPM:NYSE), which smashed estimates led by a strong performance at its global markets business due to market turbulence.
Meanwhile, if there are any tariff concerns, they aren’t being felt by JPMorgan’s well-heeled retail clients, as loan growth and credit card borrowing continued to grow apace with low default rates, yet the firm’s shares ended the day in the red.
It was the same story for Wall Street rivals Bank of America (BAC:NYSE), Goldman Sachs (GS:NYSE) and Morgan Stanley (MS:NYSE), whose shares also finished lower on the day despite blow-out results for all three firms powered by their trading desks, which like JPMorgan benefitted from volatile markets.
Non-investment banks State Street (STT:NYSE) and Wells Fargo (WFC:NYSE) fared even worse, with shares dropping 7% and 5% respectively on concerns over costs and top-line growth.
Best of the bunch was Citigroup (C:NYSE), whose shares hit their highest since 2008 on strong earnings and a $4 billion buyback, although they gave back some of their gains a day later.
Blended EPS (earnings per share) for the S&P 500 index are predicted to grow by 4.8% in the second quarter, but according to Factset senior earnings analyst John Butters they are likely to grow by 9% or almost double that rate.
‘The actual earnings growth rate has exceeded the estimated earnings growth rate at the end of the quarter in 37 of the past 40 quarters for the S&P 500,’ says Butters. The only exceptions were Q1 2020, Q3 2022, and Q4 2022.
Over the last decade, S&P 500 earnings have beaten the estimate by an average of almost 7%, adds Butters, with beats outnumbering misses three to one.
This suggests analysts repeatedly low-ball forecasts, not just for the banks but across the market, in order for companies to beat expectations and their shares to go up – except this time round, in the case of the banks at least, this dynamic seems to have faltered.
Faced with what are already demanding valuations, investors appear to have gone on a ‘buyers’ strike’ raising the question of whether on aggregate share prices will be higher or lower at the end of this earnings season.
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