Q1 US earnings season preview: banks to set downbeat tone

This week’s results are dominated by financial sector earnings gloom, and further negative news is expected as the US reporting season gets under way.

Banks including JPMorgan Chase (NYSE:JPM) are set to reveal big falls in first-quarter earnings this week, but these performances shouldn’t mean investors write off the rest of the US reporting season.

Financial data group FactSet is predicting that seven out of 11 S&P 500 sectors will see year-on-year improvements in earnings for the quarter, leading to an overall growth rate of about 4.5%.

Unfortunately for stock market sentiment, banks make up the majority of results this week: the financial sector is poised to be the weakest performer, with earnings 26% lower.

Significantly higher provisions for loan losses compared with 2021 are expected to depress the outturn, even though top-line performances are likely to remain healthy.

FactSet notes that JPMorgan Chase took $8.3 billion in provisions for loan losses in the first quarter 2020, but reversed this by $4.2 billion last year as pandemic worries eased. For tomorrow’s results, the estimated provision for loan losses is $679 million.

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Wall Street has forecast that JPMorgan will report a 42% fall in net income to $8.2 billion, while Goldman Sachs (NYSE:GS) is set to follow the next day with a decline of more than 50%. Other big banks reporting before Thursday’s opening bell include Morgan Stanley (NYSE:MS), Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C).

Their guidance on the outlook for net interest margins and loan growth will be closely watched at an extraordinary time for the US economy, with interest rates now poised to rise faster than at any time in two decades.

Consumer confidence has taken a significant hit since the Ukraine war, with the impact on oil, food and other commodity prices contributing to more S&P 500 companies issuing negative earnings guidance for the first quarter than in recent periods.

Out of 96 companies to issue guidance, FactSet says 67 were negative. At 4.5%, the overall estimated growth rate is not only much lower than the 5.7% forecast in December, but it will be the lowest earnings growth rate reported by the S&P 500 since the end of 2020.

Big upward revisions for energy stocks including Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) have boosted the expected rate of return, however, supported by more modest upgrades in materials and industrials.

Overall, Bank of America expects a robust first-quarter performance and says leading indicators point to a 4% beat against current earnings forecasts. It says: “Hard data remains solid, leading indicators are positive and companies are upbeat despite headwinds.”

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However, the bank thinks this will be the last “big beat for a while” and believes that Wall Street is being far too optimistic about the outturn for the rest of the year.

It predicts that the Q1 results will mark a reset of expectations, given that margins and other forecasts are currently “unrealistically high”.

It wrote this week: “Analysts expect record margins in Q2-Q4, with earnings slated to accelerate into 2023. But history suggests that oil shocks spawn weaker consumption with a three to four-quarter lag, indicating a H2 slowdown.”

This view was backed up today by the Bank’s monthly global survey of fund managers, which shows that fears of a “fast and furious Fed” have sent growth optimism to an all-time low.

About 15 companies in the S&P 500 are due to report this week, with Tesla (NASDAQ:TSLA), Netflix (NASDAQ:NFLX) and Procter & Gamble (NYSE:PG) among those due the following week. The earnings season really gets going in the final week of April, including updates from Alphabet (NASDAQ:GOOGL), Apple (NASDAQ:AAPL) and Twitter (NYSE:TWTR).