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JPMorgan, Wells Fargo and Citigroup are part of Zacks Earnings Preview

For Immediate Release

Chicago, IL – July 15, 2019 – releases the list of companies likely to issue earnings surprises. This week’s list includes JPMorgan JPM, Wells Fargo WFC and Citigroup C.

What to Expect from Bank Earnings?

Bank stocks have done reasonably well lately, contrary to general perception of the group as a laggard and victim of the dovish Fed outlook. The chart below shows the year-to-date stock market performance of the Zacks Major Banks industry relative to the S&P 500 index and the Zacks Finance sector.

The blue line in the chart represents the Zacks Major Banks industry, which includes Citigroup that reports on Monday July 15th and JPMorgan and Wells Fargo that report on Tuesday July 16th. The recent most catalyst for the group turned out to be the late-June completion of the Fed’s ‘stress test’ (officially called Comprehensive Capital Analysis and Review or CCAR) that allowed these players to return ever increasing amounts to shareholders through cash dividends and buybacks.

The Dodd-Frank legislation in the wake of the 2008 crisis made banks better capitalized and more stringently regulated. The goal was to make this important part of the economy safer and less prone to riskier behavior. Banks have become boring as a result, almost like utilities, with many of the major industry players promising juicy dividend yields (JPMorgan currently yields 3.2%).

The group’s earnings performance has been good; not great, but good. On most key operating metrics, bank performance was been very strong in recent quarters and we will most likely see a repeat performance this earnings season as well.

Key parts of the market’s worry list for banks include the interest rate backdrop and its related implications for the broader economy. With the current U.S. economic expansion on the verge of becoming the longest in history, many in the market justifiably worry about the duration and stability of the economy’s growth trajectory.

Keep in mind that banks are cyclical businesses engaged in lending and other activities like investment banking, money management, and trading that are always at the mercy of the economic cycle. Banks not only experience low demand for its services when the economic cycle turns down, but the quality of its existing assets (its loan portfolio) also goes down as its customers’ credit profiles weaken.

The Fed’s recent dovish tilt is aimed at forestalling worries about trade and global growth from bleeding into business and market sentiment. The momentum in stock and other asset prices suggests that it is working, even though it is prompting cuts to earnings estimates for  banks.

What Are Banks Expected to Earn?

Total Q2 earnings for the Zacks Major Banks industry that includes Citi, JPMorgan, Wells Fargo and other major industry players are expected to be down -5.4% from the same period last year on +0.2% higher revenues. This would follow the +2% earnings growth on +0.8% higher revenues for the group in Q1.

The table below shows Q2 expectations for the constituent industries of the Finance sector, contrasted with what was reported in Q1 and what is expected for Q3. Please note that the Major Banks industry represents the biggest slice of the Finance sector, accounting for almost 45% of the sector’s total earnings.

The decline is primarily a function of tough comparisons, with the year-earlier tally reflecting one-time boost from the tax cut legislation.

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