Financials Fail To Impress In Earnings Season So Far (XLF)

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July 17, 2017 6:26am NYSE:XLF


From Zacks: JPMorgan (JPM – Free Report) and Citigroup (C – Free Report) handily beat earnings and revenue estimates while Wells Fargo (WFC – Free Report) beat earnings expectations but modestly missed revenue estimates.

The market wasn’t impressed these results, with all three bank stocks ending the otherwise positive Friday session in negative territory. A big reason for the market’s lukewarm reaction to the seemingly positive bank earnings is the soft guidance for the current period, particularly from JPMorgan. This will likely show up in lowered Q3 estimates in the coming days.

Bank stocks struggled in April and May as treasury yields kept going down, but they came back strong in June on the back of a trend reversal in yields and better than expected ‘Stress Test’ results that opened up outsized capital returns opportunities. Most of the headwinds facing banks in Q2 weren’t new; we knew that the capital markets business was soft due to muted volatility and that lower treasury yields would be weighing on margins even as growth in loan portfolios had started decelerating. Estimates had started coming down in the run up to these reports, but not by that much.

Results from these money-center banks and PNC Financial (PNC – Free Report) , which also reported June-quarter results on Friday, offer useful but not very favorable read-throughs for the regional banks and investment banks coming out with results this week.

Finance Sector Scorecard

It is still fairly early, with results from only 4 Finance sector companies in the S&P 500 (out of 95 total) out already. But these 4 companies are the some of the largest in the entire index and account for 22% of the sector’s total market capitalization in the index. Total earnings for these 4 Finance sector companies are up +6.2% from the same period last year on +2.5% higher revenues, with all 4 beating EPS estimates and 3 beating top-line estimates.

The chart below compares the growth pace (earnings and revenue) and proportion of positive surprises for these 4 banks with what we saw from this same group of companies in other recent periods.

What this shows is that the Q2 earnings and revenue growth pace is below what we saw from the same four banks in the preceding quarter, but is otherwise better than other recent historical periods.

Total Q1 earnings for the sector as a whole, combining the reported actual results with the still-to-come estimates, are expected to be up +9.3% from the same period last year on +1.7% higher revenues. The chart below shows the sector’s Q2 earnings growth expectations contrasted with estimates for the following four quarters and actual results for the preceding two periods.

Please note that the sector’s earnings growth expectation has gone up following the better than expected big bank results. It is very likely that the overall growth pace for the sector outpaces the strong showing we saw from the sector in the preceding period.

The table below shows the sector’s Q2 earnings growth expectations at the medium-industry level contrasted with estimates for the following four quarters and actual results for the preceding three periods.

Please note that the Major Banks industry, of which JPMorgan, Wells Fargo and others are part, accounts for roughly 45% of the sector’s total earnings (insurance is the second biggest earnings contributor, accounting for about 25% of the total).

Q2 Earnings Season Scorecard (as of Friday, July 14, 2017)

We now have Q2 results from 30 S&P 500 members that combined account for 9.3% of the index’s total market capitalization. Total earnings for these companies are up +13.8% from the same period last year on +6% higher revenues, with 83.3% beating EPS estimates and an equivalent proportion beating revenue estimates.

The charts below compare the Q2 results thus far from the 30 index members with what we had seen from the same group of companies in other recent periods.

This is still a fairly small sample of results, but what has come out already represents an improvement over what we had seen from the same group of index members in other recent periods.

We have a very busy docket of reports this week, with more than 200 companies reporting results, including 68 S&P 500 members. But we can clearly say that the Q2 earnings season is off to a good start. By the end of this week, we will have seen results from almost one-fifth of the S&P 500 members.

The chart below shows the weekly calendar of earnings releases for the entire Q2 earnings cycle. As you can see, we are about two weeks away from the reporting cycle really ramping up.

Q2 Expectations

Total Q2 earnings are expected to be up +6.6% from the same period last year on +4.5% higher revenues. This would follow +13.3% earnings growth in 2017 Q1 on +7.0% revenues growth, the highest growth pace in all most two years.

The table below shows the summary picture for Q2, contrasted with what was actually achieved in Q1.

The chart below shoes Q2 earnings growth expectations contrasted with what is expected in the following three quarters and actual results in the preceding 5 quarters. As you can see in the chart below, this growth pace is expected to continue through the rest of the year.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview. He manages the Zacks Top 10 and Focus List portfolios and writes the Weekly Market Analysisarticle for Zacks Premium subscribers.

The Financial Select Sector SPDR Fund (NYSE:XLF) fell $0.11 (-0.44%) in premarket trading Monday. Year-to-date, XLF has gained 7.18%, versus a 9.86% rise in the benchmark S&P 500 index during the same period.

XLF currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 39 ETFs in the Financial Equities ETFs category.

This article is brought to you courtesy of Zacks Research.

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