Bank Earnings And Inflation Provide Relative Relief – Forbes

Bank Earnings Were Almost Uniformly Better Than Expected
Earnings season kicked off last week with 9 S&P 500 companies reporting and banks and financial companies dominating the total. The S&P 500 soared by almost 2.7% for the week. Consumer inflation (CPI) provided a spark, and bank earnings were generally better than expected. Bank shares rose 2.2%, and regional banks were over 1.5% higher last week. The pace and the breadth of the fourth-quarter earnings season accelerate this week, with 26 S&P 500 companies scheduled to report.
At this early juncture, blended earnings, which combine actual with estimates of companies yet to report, are lower than forecasts at the end of the quarter but improved last week. The high earnings growth rate for the industrials remains misleading since the airlines reported a loss in the fourth quarter of 2021 and should post a profit this quarter. Only two sectors, real estate and health care, are expected to post higher earnings than expected on December 30th. The energy sector has the highest expected growth rate driven by increased energy prices, with expected earnings slated to increase by 61% year-over-year. On a related note, Berkshire Hathaway BRK.B continued to buy shares of Occidental Petroleum OXY (OXY) in 2022 and now owns over 20% of the company. A previous piece discussed why Warren Buffett’s Berkshire Hathaway could be adding to its holdings in Occidental Petroleum.
4Q Earnings By Sector
The blended revenues paint a similar picture, with only three sectors, real estate, consumer staples, and health care, having better estimates than at the end of the quarter. Sales in the energy sector illustrate the robust increase in energy commodity prices.
4Q Sales By Sector
So far, the blended earnings performance has underperformed expectations at the end of the quarter. Combining actual results with consensus estimates for companies yet to report, the blended earnings growth rate for the quarter improved to -3.9% year-over-year, below the expectation of -3.2% at the end of the quarter. Despite the rise in fourth-quarter blended earnings, expected earnings growth for the calendar year 2023 declined this week.
S&P 500 Earnings Estimates
Bank and financial earnings dominated the first week of the earnings season. Headline earnings from the banks were almost uniformly better than expected. BlackRock BLK (BLK), Bank of New York Mellon BK (BK), Bank of America (BAC), JPMorgan (JPM), Wells Fargo WFC (WFC), and First Republic (FRC) beat earnings estimates, while only Citigroup C (C) missed expectations. Core earnings remained solid, boosted by lending, benefitting from rising interest rates. Net interest margin (NIM), the spread a bank earns in interest on loans compared to the amount it pays in interest on deposits, was solid across the banks. While the banks are preparing for future possible loan losses by increasing reserves, actual delinquencies and credit trends have remained benign so far. The 2022 bear market in stocks negatively impacted investment banking and wealth management-related earnings, but the core lending business of the banks remained healthy. The banks guided for at least a more challenging economic environment in 2023. For example, JPMorgan is planning for a mild recession in late 2023. More banks and financials report this week, including Goldman Sachs (GS), Morgan Stanley MS (MS), Schwab (SCHW), PNC Financial (PNC), Discover Financial Services DFS (DFS), and several regional banks.
Outside of the earnings season, stocks were boosted by moderating December consumer inflation data. The headline CPI reading declined to 6.5% year-over-year rate from 7.1% in November and well below the high of 9.1% in June. The better headline inflation reading had less attractive underlying details, with the sticky inflation components continuing to climb. Despite the troubling details, market-based measures of expected inflation are now pricing in that inflation is on a path toward a bit over 2%. This improvement in expectations has boosted stocks but also presents a risk to the rally if inflation proves to be more stubborn than market expectations.
Headline & Sticky Inflation
Markets expect only two more short-term interest rates from the Federal Reserve (Fed) in its battle against inflation. The market has currently priced in an upcoming hike of 25 basis points (0.15%) at the meeting on February 1st and another 25 basis points on March 22nd. Despite the high probability of a recession in 2023, continued improvement in inflation and an end to Fed rate hikes open the window slightly to dodging the economic downturn.
One-Year Forward Fed Funds Futures Rate
It is still very early, but headline earnings improved last week but remained below estimates at the end of the quarter. As discussed last week, margin pressures, inflation, and the strong dollar remain headwinds for the fourth quarter earnings season. Still, actual results can outpace the dour estimates at the beginning of the earnings season. This week a more diverse group of companies beyond the banks reports earnings, so it will be instructive to see if the earnings performance continues its relative improvement. Markets are likely to be particularly sensitive to forward guidance from companies while the probability of recession in 2023 remains high.
Disclosure: Glenview Trust currently has holdings of JPMorgan (JPM), Goldman Sachs (GS), PNC (PNC), US Bancorp (USB), Citigroup (C), Bank of America (BAC), Charles Schwab (SCHW), Goldman Sachs (GS), Discover Financial (DFS), and Wells Fargo (WFC) within its recommended investment strategies.

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