The second-quarter earnings announcement season is now underway, but reports will start coming in fast and furious in the next couple of weeks.
I also expect wave-after-wave of positive earnings results. Currently, FactSet estimates that the S&P 500 will achieve second-quarter earnings growth of 64% and sales growth of 19.7%. That represents the highest year-over-year earnings growth rate since 2009 and the highest sales growth rate since 2008. Analysts have also upped earnings estimates by 7.3% since the end of March, so even stronger results are anticipated.
We’ve seen this with most of the big banks. JPMorgan Chase & Co. (JPM), Bank of America (BAC), Citigroup (C), Wells Fargo & Co. (WFC) and Morgan Stanley (MS) released their earnings results this week, “officially” kicking off the earnings season. Interestingly, the analyst community revised its earnings estimates 119.5% higher for the financial sector.
Helping boost analysts’ predictions was the expectation that the big banks would release some of the billions in loss provisions they’d set aside to prepare for loan losses in the aftermath of the pandemic. That, in turn, would help boost the banks’ bottom lines.
The majority of the financial stocks climbed higher earlier in the week thanks to their better-than-expected earnings reports. Wells Fargo jumped 1.8% this week and Morgan Stanley climbed about 2.9%. However, JPMorgan fell 1.4%, Citigroup dropped 1.6% and Bank of America declined about 4.2%.
As you can see in the chart above, except for Morgan Stanley, year-over-year earnings rose in a big way for these big banks. Now, let’s take a deeper dive into their earnings results.
JPMorgan Chase & Co. (JPM): Second-Quarter Earnings announced on Tuesday, July 13
JPMorgan Chase beat Wall Street’s estimates on the top and bottom lines. Earnings per share of $3.78 beat consensus estimates for $3.21, while revenue of $31.4 billion beat estimates by roughly $1.5 billion. So, JPMorgan posted a 20% earnings surprise and a 2.7% revenue surprise.
The firm posted a $2.3 billion boost from releasing $3 billion in loan loss reserves after taking $734 million in charge-offs. The bank had a $5.2 billion reserve release in the first quarter.
Bank officials noted the U.S. economy appeared better off than previously estimated and expect a smaller contraction in GDP over the coming three quarters.
However, the company’s trading division declined in the second quarter, with revenue of $4.1 billion coming in just shy of estimates for $4.16 billion, and down 30% from last year.
Bank of America (BAC): Second-Quarter Earnings announced on Wednesday, July 14
Bank of America also posted a mixed quarter. Earnings per share of $1.03 topped g estimates of $0.76, while revenue came in under expectations of $21.77 billion at $21.47 billion. So, Bank of America reported a 35.5% earnings surprise but a 1.5% revenue miss.
Revenue also fell 4% from a year earlier. The company said the drop was driven by a 6% decrease in net interest income because of lower interest rates. Lower trading revenue and the absence of a $704 million gain a year earlier also hit revenue.
BAC’s results and subsequent sell-off show the negative impact of falling interest rates on the financial sector. Banks gather deposits and extend loans; falling interest rates squeeze the margin between what they pay depositors and charge borrowers. The bank’s net interest margin of 1.61% in the quarter was below the 1.67% estimate of analysts surveyed by FactSet.
Citigroup, Inc. (C): Second-Quarter Earnings announced on Wednesday, July 14
Citigroup’s year-over-year growth wasn’t far behind JPMorgan, with a 233% rise. Earnings per share beat expectations of $1.88 by 51.05%, with the company reporting earnings of $2.84, making for a 50.2% earnings surprise. Revenue also topped expectations of $17.18 billion, coming in at $17.47 billion, so Citigroup posted a 1.6% revenue surprise.
While the bank managed to barely top expectations for revenue, revenue still declined 12% from a year earlier. This was driven in part by lower results in fixed income trading, falling credit card loans and dropping interest rates.
The firm’s earnings jumped after it released reserves set aside for loan losses, resulting in a $1.1 billion benefit after $1.3 billion in charge-offs. A year ago, the bank had been forced to set aside billions for expected credit losses, resulting in an $8.2 billion credit cost.
Wells Fargo & Company (WFC): Second-Quarter Earnings announced on Wednesday, July 14
Wells Fargo posted a second-quarter earnings beat, with earnings per share coming in at $1.40, compared to expectations for earnings of $0.92 per share. Revenue jumped 11% from a year earlier to $20.27 billion, crushing estimates of $17.72 billion. So, Wells Fargo achieved a 47.3% earnings surprise and a 14.4% revenue surprise.
Net income was $6 billion, compared to a loss of $3.8 billion in the second quarter of 2020. Income received an extra lift as the bank reduced its reserves for potential loan losses by $1.6 billion, or $0.30 per share.
Morgan Stanley (MS): Second-Quarter Earnings announced on Thursday, July 15
Morgan Stanley’s earnings of $1.89 per share topped earnings expectations of $1.66 per share, equating to a 13.7% earnings surprise. Revenue also beat expectations by over $400 million, at $14.8 billion, so Morgan Stanley posted a 5.5% revenue surprise. However, this year’s earnings were down slightly compared to last year’s earnings results.
The bank’s massive wealth management business, bolstered by the E-Trade acquisition last year, posted $6.1 billion in revenue, edging out the $5.9 billion estimate.
My Outlook for the Rest of the Second-Quarter Earnings Season
Despite topping earnings estimates, I don’t believe the big banks’ momentum will continue in the longer term. The reality is that with the effects of the pandemic wearing off, these massive financial companies are scrambling to find a new driver of earnings.
Without special circumstances, like releasing the loan-loss reserves in the case of many of these banks, these companies would not have beat expectations.
Take JPMorgan for example. The company noted that had it not released $3 billion in loan-loss reserves it built up last year, earnings would have been $3.03 per share, just below the $3.13 per share forecast. With the release, profit came in at $3.78 a share.
Loan activity is also extremely low across the board, so investors are still wondering what the banks will use to accelerate growth in the coming quarters.
So, I’m not too excited about this sector right now.
Earnings reports for my Model Portfolio stocks will be coming in fast and furious over the next few weeks. And I expect their solid results to dropkick the companies’ stocks and drive them higher. If you want to get in before the stocks take off and get the most bang for your buck, now is the time to join.
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If you sign up now, you will be able to join my exclusive Platinum Growth Club Live Chat Event for July on Monday, July 19, at 12:00 p.m. ET. I will be discussing a wide range of topics, including my current market outlook, the second-quarter earnings season, and my latest thoughts on the “Goldilocks” environment. During this Live Chat event, I will also answer subscriber questions in real-time, so I encourage you to sign up now so you can jump to the front of the line with your question. If you’re interested, you can sign up now by clicking this link.
Note: The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owned the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
Bank of America Corporation (BAC), JPMorgan Chase & Co. (JPM)