Earnings Season Preview

• Wall Street banks kick off earnings season on Friday
• EPS estimates seen down -10%
• BofA, Citi calling top on frothy market

The S&P 500 has risen over 1% this week to make a fresh record high, closing above 3,800 for the first time in its history. Ebullience is a factor of the hope in vaccines leading to a return to normal, corporate earnings improving sharply in 2021, and a broadly expansionary fiscal and monetary environment offering succour to equity valuations. So we come into earnings season with markets in overall good shape, arguably looking a bit toppy and expensive as multiples are stretched and vaccines are yet to deliver the bounce back hoped for. Payroll numbers on Friday (-140k) highlight the problem facing the US economy in terms of long-term damage but also the low bar being set. Looking beyond the Q4 figures, guidance on the upcoming Q1 2021 quarter will no doubt be more important than ever.

All else equal, stretched multiples in 2021 ought to contract slightly as rates rise but EPS should improve faster with more expansionary and redistributive pro-cyclical policy in Washington. The Democrat wins in Georgia have taken us to Blue Wave territory, though it’s important to stress that with the Senate 50/50 and one Democrat (Joe Manchin) already saying he would not approve more radical policies, we are not in Blue Tsunami mode.

The average earnings per share (EPS) on the S&P 500 are seen falling by around -10% on last year’s fourth quarter, with revenues seen flat. This compares with the –7% drop in Q3 and –32.2% decline in Q2 at the height of the pandemic and it has been revised up from –12.8% in September. Q1 2021 EPS is currently forecast at +12.6% so a key theme of this season will be to what extent corporates think the growth trend will pick up at the start of this year, or do they fear of a stop-start recovery?

Key themes

• Are banks optimistic about net interest margins as yield curve steepens?
• Are banks ready to recommence buybacks? Or, rather, just big are these buybacks going to be?
• Do they see further reflationary pressures?
• Do CFOs predict earnings growth to pick up further in Q1 on the vaccine rollout?
• What do CEOs think about the likely fiscal expansion and procyclical stimulus from a Democrat Congress?
• Are CEOs fearful of Blue Wave of regulation and higher corporate taxes?
• How confident are the energy companies about oil price stabilisation persisting?
• How have the Stay-at-home stocks performed after the pull-forward in demand in Q2 and Q3?
• Are Zoom, Amazon, Netflix et al able to manage expectations for future growth?

This week’s highlighted stock

JPMorgan Chase & Co (JPM): JPM has been buoyed by strong trading revenues at its investment bank, whilst bad loans are not as big a problem as investors thought they would be at the peak of the pandemic. The arrival of fresh stimulus has undoubtedly been a boost to bank shares as it limits the damage of bad loans and it helps steepen the yield curve, boosting net interest income. JPM has already committed to buying back $30bn in stock after the Fed announced in December that it will allow Wall Street’s largest banks to resume share buybacks in the first quarter of 2021, subject to certain rules.

In particular, we will be keen to hear from Jamie Dimon and co about their outlook for rates and how this could impact net interest margins and income. In Q3 net interest income was $13.1 billion, down 9% year-over-year, predominantly driven by the impact of lower nominal rates. However, since then the 10-year yield has risen to nine-month highs above 1.10% and spreads have widened with the with the 2s10s curve steepening further to 0.91%, the widest in well over 3 years. The 5s30s spread is at its widest since 2016. Revenues expected $28.337bn. EPS expected $2.50.

Citigroup Inc (C) and Wells Fargo & Co (WFC) are also reporting on Friday a day after BlackRock Inc (BLK) gets the show on the road.

Jefferies upgraded JPM and WFC this week, stating that EPS estimates are up on a “less bad” credit outlook. And whilst banks are struggling to drive revenue growth, the analysts believe that “higher long rates and an eventual turn in loan growth could join strong deposit growth, better cost control, and a restart of buybacks as positives”.

US Earnings Calendar Highlights