Q1 earnings season to get underway with Wells Fargo, JP Morgan, Citigroup and Goldman Sachs – Stock Market News

Raffi Boyadjian, XM Investment Research Desk

The US earnings season for the first quarter will enter into full gear on Friday with the big banks leading the way. JP Morgan Chase & Co (JP Morgan) and Wells Fargo & Co (Well Fargo) will be the first of the major US banks to report on Friday before the market open, while Citigroup Inc (Citigroup) and Goldman Sachs Group Inc (Goldman Sachs) will report their results on Monday, also before the market open.

After an exceptionally strong 2018, corporate earnings in the first quarter are expected to post their first decline since the second quarter of 2016. But following some mixed signals on the economy, the results of Wall Street’s financial giants will be dissected by investors for evidence that the gloom regarding the earnings outlook may have been overdone.

The results will also be a litmus test for the wider financial sector amid a pause in the Federal Reserve’s rate hike cycle and an inversion in part of the yield curve. Low interest rates and a flat or inverted yield curves tend to have a negative impact on banks’ profitability.

Mixed estimates for Well Fargo

Some banks such as Wells Fargo are also still reeling from scandals involving unfair trade practices that recently led to the ousting of the bank’s CEO, Tim Sloan. While Sloan’s departure may have pleased regulators, the bank’s share price has been under pressure as investors are doubtful that a replacement can be found who will be able to deal with the challenges facing the company. There are also concerns that a new CEO may not prioritize existing targets on cost savings.

Consequently, the mean recommendation for Wells Fargo’s stock has been downgraded from ‘buy’ to ‘hold’ following Sloan’s exit and the Q1 earnings estimates will likely highlight the bank’s struggles. Wells Fargo is expected to report revenue of $21.013 billion for the first quarter according to estimates by Refinitiv, which would represent a drop of 4.2% from the same period a year ago, though this would be slightly higher than the $20.980 billion posted in the previous quarter.

Earnings per share (EPS) are also expected to be mixed. Analysts are forecasting EPS to rise slightly from 1.09 in Q4 2018 to 1.10 in Q1. But this would still be 2% below the 1.12 figure reported a year earlier.

JP Morgan at risk of another earnings miss

JP Morgan will be the other company to report on Friday. The banking behemoth missed its estimates in Q4 for the first time in 15 quarters and there’s a risk its earnings could again fall short of expectations as the low market volatility and trading volumes recorded during the first three months of the year are thought to have hurt profits in its investment banking division. Q1 revenue is forecast at $28.448 billion, up 6.1% from the prior quarter but down 0.25% from a year ago. EPS is expected to have risen from 1.98 in Q4 to 2.35 in Q1, representing yearly growth of 4.1%.

While such a set of results would be nothing short of a solid performance, analysts are worried about the outlook and have cut their mean recommendation in recent weeks from ‘buy’ to ‘hold’. The slowdown in the global economy and the subsequent dovish shift by central banks around the world does not bode well for future revenue growth. And with uncertainty around trade and Brexit still lingering, international bodies such as the IMF continue to cut their growth forecasts.

Goldman Sachs and Citigroup unlikely to impress much either

It’s a similar story for Goldman Sachs, which reports its earnings on Monday and also generates a big chunk of its revenue from investment banking. Its mean recommendation was cut from ‘buy’ to ‘hold’ late last year and has not been upgraded despite posting a record EPS of 25.27 per share for the full year 2018.

Goldman Sachs is expected to announce Q1 revenue of $9.036 billion, an increase of 11.8% over the quarter but a decline of 10% from the same period a year ago. But EPS is anticipated to fall both on a quarterly and annual basis. Analysts are estimating an EPS of 4.89 for Q1, down 29.7% from a year ago and 19% from Q4 2018.

Finally, the other focus on Monday will be on Citigroup’s earnings. Citigroup is the only one out of the big four that has retained a ‘buy’ mean recommendation. The bank also has a strong track record of beating its earnings estimates. However, the positive run may not last much longer as the bank’s core business is not growing, and higher profitability has mostly been achieved from aggressive cost cutting.

In fact, the trend in Citigroup’s revenue growth has been flat since 2011 and the first quarter results are unlikely to dispel worries about income growth. Revenue is forecast to rise by 8.8% over the quarter to $18.634 billion in Q1, to stand 1.3% lower from a year earlier. EPS is looking more attractive though and is expected to increase by 11.8% from the prior quarter and 7% over the year to come in at 1.80.

Bank stocks have been underperforming

A disappointing set of earnings releases would likely weigh on the banks’ share prices as well as the wider financials sector, which has been lagging the broader S&P 500 index since March after outperforming it during 2017 and the first half of 2018. Poor results would also heighten concerns around the global slowdown as banks’ earnings are sensitive to changes in the business cycle. However, some of the hit on profits is seen to be due to one-off factors, such as the government shutdown at the start of the year and the tax cut effects fading out.

But with bank valuations still below that of the S&P 500 average, downside moves to financial stocks may be limited. Goldman Sachs currently has the lowest price/earnings (PE) ratio at 8.46, followed by Citigroup (9.77). JP Morgan has the highest PE at 11.72 and Wells Fargo is not far behind (11.07). They compare with an average PE of 20.25 for the S&P 500.

Positive earnings surprises are possible

The attractive valuations also make bank stocks more susceptible to upswings should their earnings surprise on the upside, especially if there’s a stronger-than-expected boost to profits from recent share buyback programmes. Traders should also be cautious of knee-jerk reactions to the earnings announcements as the results may not appear so bad once all companies have reported. Bank shares could reverse their initial moves if the close of the earnings season paints them in a relatively more positive light.

For Wells Fargo, the immediate danger to the downside is the $47 level, which if broken, could put the stock back on a bearish path. But to restore its bullish structure, the share price would need to successfully re-challenge the March top of $52.42. The March highs are also critical for JP Morgan, Goldman Sachs and Citigroup, which at $108.40, $206.45 and $66.83, respectively, need to be overcome if the stocks are to resume their recovery from the late 2018 sell-off.

In the opposite direction, the key support for JP Morgan stock is the $98 handle, near the March trough, while for Goldman Sachs, the $186.50 level would signal a switch to a negative bias. As for Citigroup, the big target for the bears is the $60 handle.