Earnings season is upon us once again! It’s just like the holiday season except instead of presents and sweets we get financial results and conference calls.
Big bank earnings will mark the unofficial beginning of the second quarter earnings period when they report this week, starting with JPMorgan Chase on Thursday. Citigroup, PNC and Wells Fargo will open their books on Friday.
Investors, worried about recession, will be scrutinizing the results for any guidance by Wall Street’s most powerful executives on the state of the economy.
Last month JPMorgan CEO Jamie Dimon said that his company is preparing for a “non-benign environment” and “bad outcomes” and warned investors to brace themselves for an impending economic “hurricane.” Investors will certainly want an update from the CEO-turned-meteorologist next week.
Earnings dates
- Thursday: JPMorgan Chase reports Q2 earnings
- Friday: BlackRock, Citigroup, PNC and Wells Fargo report Q2 earnings
- July 18: Bank of America earnings
Concerns about upcoming economic gloom have already driven a large market sell-off: The S&P 500 just closed its worst first-half of a year in over five decades, but earnings guidance has so far largely remained unchanged. This has led some analysts to wonder if the current projections will hold up during this reporting season.
“The key thing to look for is the reserves,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder, referring to the cash that financial institutions must have on hand to meet central bank requirements. “How much they’re reserving will show how concerned they are about a recession. That will be data that will be closely watched by analysts and investors alike, that’s very key.”
Analysts expect overall S&P 500 earnings to grow by 5.6% in the second quarter, down from an expected 6.8% at the start of April, according to Refintiv data. That would mark the slowest quarter of growth since the fourth quarter of 2020.
That 5.6% estimate is also inflated by the energy sector, which has benefited greatly from jumps in the price of crude oil this quarter. Energy earnings are expected to jump 205%, according to analysts at Wells Fargo Investment Institute. Without energy, overall S&P earnings are expected to fall by 2%.
Financials, a sector that includes the big banks, will likely feel the burn based on tough comparisons to last year, including the release of loan loss reserves, wrote Chris Haverland, a strategist at Wells Fargo Investment Institute, in a recent note. He clocks the sector’s second quarter earnings per share growth at an alarming -22%.
Federal Reserve rate hikes, meanwhile, continue to pinch banks’ mortgage business. The 30-year fixed-rate mortgage averaged 5.30% in the week ending July 7, down from 5.70% the week before, according to Freddie Mac. That’s the largest decline since December of 2008. Fannie Mae economists predict that total home sales will drop by 13.5% this year and that mortgage originations will fall by nearly 42%.
Wells Fargo reported a 33% decline in mortgage revenue in quarter one and JPMorgan reported a 20% drop. Analysts expect that decline to continue this quarter. The banks, meanwhile, are planning staff layoffs, according to Reuters reports.
JPMorgan is expected to report earnings of $2.94 per share, according to Refinitiv data, down from $3.78 last year. Citigroup is expected to report an EPS of $1.69, below last year’s $2.63, and analysts predict that Wells Fargo will report earnings of $0.85 per share, down from $1.38 in the second quarter of 2021.
But investors have already factored in those drops, said Ghriskey, and barring any surprises there shouldn’t be any major market swings.
JPMorgan stock is down nearly 30% year-to-date. Citigroup has fallen 26% and Wells Fargo has dropped 22%.
“There isn’t a lot of investment banking work going on right now. They’re not making much money on equity trading. Home sales are soft,” he said. “This is very typical for a Fed rate hike cycle and it does argue for the potential of a true recession sometime later this year or next year.”
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