Business

Imminent bank revenues: what to expect

ProDentim

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Note: The following is an excerpt from this week’s article. Earnings Trends report. You can access the complete report which contains actual historical and detailed estimates for the current and next periods, please click here>>>

Here are the key points:

  • Q2 2023 earnings for the S&P 500 are expected to fall -9.7% from the same period last year on revenue down -0.5%, with margin declines for the 6e consecutive quarter resulting in lower profits.
  • The -9.7% decline in Q2 earnings will be the 3rd consecutive quarter of declining earnings for the S&P 500 as it would follow the -3.4% decline in Q1 2023 and the -5.4% decline in Q4 2022.
  • Earnings estimates for the second quarter have fallen since the start of the quarter, but the magnitude of the estimate cuts was significantly less than what we have seen in other recent comparable periods. The -9.7% decline in Q2 earnings today is down from -7.2% at the start of the period.
  • Looking at the calendar year chart, total S&P 500 earnings are expected to fall -3.8% on revenue up +0.4% in 2023. Excluding the financials sector, earnings for the year 2023 would be down -6.4%, but index earnings would be down. down only -0.8% excluding Energy.

For the second quarter of 2023, S&P 500 earnings are expected to decline -9.7% from the same period last year with revenue down -0.5%. This would follow the -3.4% decline in index earnings in the prior period (Q1 2023) and the -5.4% decline in the last quarter of 2022.

In other words, the second quarter of 2023 is expected to be the third consecutive quarter of declining earnings for the S&P 500. A further decline in third quarter earnings of -1.7% is currently expected, after which growth will become positive in the fourth quarter and will continue in 2024.

Image source: Zacks Investment Research

As you can see from this quarterly earnings growth forecast, the dreaded recession does not show up in this near-term earnings outlook. An overview of long-term corporate profitability also doesn’t leave much room for a recession, as you can see in the chart below.

Zacks Investment Research
Image source: Zacks Investment Research

These growth expectations reflect current bottom-up consensus earnings estimates for individual S&P 500 companies which, in turn, are based on the estimates of individual sell-side analysts covering those companies.

Predicting recessions is beyond the core competence of typical equity research analysts. But they closely monitor the changing business trends of the companies and industries they follow. Analysts maintain elaborate financial models for the companies in their coverage, which allows them to offer their earnings, revenue, and other estimates.

At Zacks, we strive to closely monitor changes in analyst earnings estimates over time. In fact, our rating system, the Zacks Ranking, is based on earnings estimate revisions.

Regular readers of our earnings commentary will know that we have reported a noticeable stabilization in the trend of estimate revisions since the start of the second quarter of 2023, reversing the persistent negative trend that had been in place for nearly a year prior.

Earnings estimates in the S&P 500 aggregate have fallen only slightly since early April, with several sectors starting to see modest positive revisions to estimates. These sectors include construction, industrial products, automotive, technology, medical and retail.

It is difficult to say at this stage if the revisions trend will remain on its recent positive trajectory or return to its initial negative trend. But it is nonetheless a market-friendly development.

Sector focus

The big banks dominate the first phase of every reporting cycle, and the second quarter earnings season will be no different, with JPMorgan JPM, Citigroup C and Wells Fargo WFC releasing their June quarter results ahead of market open Friday. July 14th.e.

While second-quarter estimates for Citigroup and Wells Fargo fell, the same for JPMorgan rose slightly. In terms of year-over-year change, Citigroup’s second quarter earnings are expected to be -40.7% below the prior year level with revenue up +0.2%. JPMorgan’s second-quarter earnings are expected to be +24% above year-ago levels with revenue up +19.9%, while the same for Wells Fargo is expected to be up +39.9 % and +19.1% compared to the level of the previous year, respectively.

The finance sector as a whole is expected to post +10.9% profit growth in the second quarter on revenues up +6.2%, which would follow the profit growth of +1.3% on revenues up +11.5% in the first quarter of 2023.

The Big Banks sector, which includes JPMorgan (JPM) and Citigroup (C), and accounts for more than 45% of total sector profits, is expected to generate +4.1% additional profits during the period on rising revenues of +11.8%. The table below outlines second quarter earnings and revenue expectations for the constituent industries of the finance sector.

Zacks Investment Research
Image source: Zacks Investment Research

Within these banks, the major commercial and consumer banking franchises are expected to show improved profitability, partially offset by continued weakness in investment banking and difficult comparisons for trading businesses. Recent comments from management teams suggest that reserve bookings should be modest in the second quarter, although exposure to commercial real estate will drive most of this activity.

The graph below presents the earnings picture of the sector on an annual basis.

Zacks Investment Research
Image source: Zacks Investment Research

Stocks in the financial sector have lagged this year, as shown in the chart below.

Zacks Investment Research
Image source: Zacks Investment Research

As you can see above, the sector followed the broader market earlier in the year, but the emergence of the regional banking crisis in March has weighed on the group ever since. It will be interesting to know if the upcoming Q2 earnings reports will help the group narrow the performance gap to some extent.

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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