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JPMorgan, Citigroup, Pepsi and Delta Air Lines are part of Zacks Earnings Preview
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For Immediate Release
Chicago, IL – July 11, 2022 – Zacks.com releases the list of companies likely to issue earnings surprises. This week’s list includes JPMorgan (JPM - Free Report) , Citigroup (C - Free Report) , Pepsi (PEP - Free Report) and Delta Air Lines (DAL - Free Report) .
Previewing JPMorgan and the Big Banks to Kick Off Q2 Earnings Season
Bank stocks have been big-time laggards in the ongoing market pullback. This is despite the fact that core features of the economy have been stable and rising interest rates are generally expected to benefit banks since they help expand their margins.
It will be interesting to see if the group's stock market fortunes will change in any meaningful way when they start coming out with June-quarter results this week. We have JPMorgan and Citigroup kicking off the Q2 reporting cycle for the group on Thursday (7/14) and Friday (7/15) this week, respectively.
As you can see above, JPMorgan shares are practically neck-and-neck with the Tech sector in the year-to-date period.
The performance variance between JPMorgan and Citigroup this year, while not much, is nevertheless likely a function of the latter's persistent earlier underperformance that Citigroup's new management has been trying to account for through a strategic restructuring and repositioning.
Bank Earnings Expectations
With respect to current earnings expectations for the group, Q2 earnings for the Zacks Finance group are expected to be down -20.4% on +3.1% higher revenues. For the Zacks Major Banks industry, of which JPMorgan and Citigroup are a part, Q2 earnings are expected to be roughly a third below the year-earlier level on +1.9% higher revenues.
For JPMorgan, Q2 earnings are expected to be -31.2% below the year-earlier level on +2.5% higher revenues, while the same for Citigroup are currently expected to change -47.8% and +3.7% respectively on a year-over-year basis.
The primary reason for the big year-over-year decline in Q2 earnings for the banks and the broader Finance sector is the very high level of reserve releases in the year-earlier period.
You would recall that the banks had booked significant reserves or provisions for loan losses as the pandemic took hold, which they subsequently released. Booking reserves is a direct hit to earnings and its subsequent release boosts profitability. This makes year-over-year comparisons somewhat misleading.
Most analysts look at bank profitability on a so-called 'pre-provision' basis, which strips out the impact of such reserves. If we look at bank profitability for 2022 Q2 on such a 'pre-provision' basis, they are essentially flat from the year-earlier level.
If we look at a money-center bank like JPMorgan, we find that commercial banking is doing just fine, with modest improvements in margins and loan volumes offset by weakness in the mortgage business and rising expenses.
On the capital markets side, the investment banking business is down significantly from the year-earlier level, perhaps by as much as -50%, with both M&A and capital raising activities materially down. On the trading front, heightened volatility in all asset classes guarantees that volumes will be up from the year-earlier level for most industry players.
Estimates for JPMorgan have modestly edged up in recent days, which suggests the strong likelihood of a positive surprise from the industry leader. Jamie Dimon's earlier 'hurricane' comment notwithstanding, it is likely that JPMorgan did better than expected in the core commercial banking side of the business.
Why the Downbeat Sentiment on Bank Stocks?
Given the cyclical orientation of the banking business, they remain vulnerable to the rising recession risks to the economy. We don't think a recession is imminent, but the fear is that a prolonged and aggressive Fed tightening cycle will push the U.S. economy into a recession. This risk is showing up in the flattening yield curve, with the yield difference (or spread) between 2- and 10-year treasury bonds steadily coming down and at times threatening to 'invert'.
I wouldn't repeat why yield curve inversions are scary things and why it's useful for all of us to keep a close eye on the risk of such a development. But I do want to point out here that I am sympathetic to the view that the current yield curve and its signaling power about future economic growth may not be fully comparable to historical periods as a result of the Fed's extraordinary QE policies since the global financial crisis.
Irrespective of this plausible but otherwise minority view of the yield inversion, they are a net negative for the growth outlook. This, coupled with elevated oil prices and the geopolitical uncertainty resulting from the Ukraine war, appear to be weighing on bank stocks lately.
As is typically the case, the sentiment shift on banks has likely overshot to the downside, as the economy still remains strong even though recessionary risks have increased from very depressed levels.
We see the bank stocks as attractively positioned currently on valuation grounds as well.
The group is currently trading at 53% of the S&P 500 multiple, which compares to a 15-year high of 132%, a low of 48% and a median of 70%.
Q2 Earnings Season Scorecard
The bank results won't be the first Q2 results since we count earnings releases for the fiscal quarter ending in May as part of the 2022 Q2 tally as well. On that count, we already acknowledge such Q2 results from 18 S&P 500 members as already out. These include bellwether operators like FedEx, Adobe, Costco and others.
For these 18 index members that have reported Q2 results already, total earnings are up +7.4% from the same period last year on +11.2% higher revenues, with 77,8% beating EPS estimates and 72.2% beating revenue estimates.
It is likely premature to draw any conclusions from this small and unrepresentative sample, but it nevertheless gives us a good sense of the ongoing margin pressures. As you can see, year-over-year revenue growth of +11.2% for these 18 index members has not been enough to produce comparable bottom-line growth. Also, revenue beats percentages are tracking on the low side at this stage.
We will see if these early trends remain in place as we enter the Q2 reporting cycle in earnest this week. We have 16 S&P 500 members on deck to report quarterly results this week. In addition to JPMorgan and Citigroup mentioned earlier, we have Morgan Stanley and Wells Fargo reporting results this week. This week's docket is geared toward the Finance sector, but we do have Pepsi and Delta Air Lines also reporting results.
The Current Earnings Backdrop
Please note that the +2.1% earnings growth expected in 2022 Q2 is solely due to strong gains in the Energy sector. On an ex-Energy basis, Q2 earnings growth drops to a decline of -5.8%.
Our 5 best-performing strategies have blown away the S&P's impressive +28.8% gain in 2021. Amazingly, they soared +40.3%, +48.2%, +67.6%, +94.4%, and +95.3%. Today you can access their live picks without cost or obligation.
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.
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JPMorgan, Citigroup, Pepsi and Delta Air Lines are part of Zacks Earnings Preview
For Immediate Release
Chicago, IL – July 11, 2022 – Zacks.com releases the list of companies likely to issue earnings surprises. This week’s list includes JPMorgan (JPM - Free Report) , Citigroup (C - Free Report) , Pepsi (PEP - Free Report) and Delta Air Lines (DAL - Free Report) .
Previewing JPMorgan and the Big Banks to Kick Off Q2 Earnings Season
Bank stocks have been big-time laggards in the ongoing market pullback. This is despite the fact that core features of the economy have been stable and rising interest rates are generally expected to benefit banks since they help expand their margins.
It will be interesting to see if the group's stock market fortunes will change in any meaningful way when they start coming out with June-quarter results this week. We have JPMorgan and Citigroup kicking off the Q2 reporting cycle for the group on Thursday (7/14) and Friday (7/15) this week, respectively.
As you can see above, JPMorgan shares are practically neck-and-neck with the Tech sector in the year-to-date period.
The performance variance between JPMorgan and Citigroup this year, while not much, is nevertheless likely a function of the latter's persistent earlier underperformance that Citigroup's new management has been trying to account for through a strategic restructuring and repositioning.
Bank Earnings Expectations
With respect to current earnings expectations for the group, Q2 earnings for the Zacks Finance group are expected to be down -20.4% on +3.1% higher revenues. For the Zacks Major Banks industry, of which JPMorgan and Citigroup are a part, Q2 earnings are expected to be roughly a third below the year-earlier level on +1.9% higher revenues.
For JPMorgan, Q2 earnings are expected to be -31.2% below the year-earlier level on +2.5% higher revenues, while the same for Citigroup are currently expected to change -47.8% and +3.7% respectively on a year-over-year basis.
The primary reason for the big year-over-year decline in Q2 earnings for the banks and the broader Finance sector is the very high level of reserve releases in the year-earlier period.
You would recall that the banks had booked significant reserves or provisions for loan losses as the pandemic took hold, which they subsequently released. Booking reserves is a direct hit to earnings and its subsequent release boosts profitability. This makes year-over-year comparisons somewhat misleading.
Most analysts look at bank profitability on a so-called 'pre-provision' basis, which strips out the impact of such reserves. If we look at bank profitability for 2022 Q2 on such a 'pre-provision' basis, they are essentially flat from the year-earlier level.
If we look at a money-center bank like JPMorgan, we find that commercial banking is doing just fine, with modest improvements in margins and loan volumes offset by weakness in the mortgage business and rising expenses.
On the capital markets side, the investment banking business is down significantly from the year-earlier level, perhaps by as much as -50%, with both M&A and capital raising activities materially down. On the trading front, heightened volatility in all asset classes guarantees that volumes will be up from the year-earlier level for most industry players.
Estimates for JPMorgan have modestly edged up in recent days, which suggests the strong likelihood of a positive surprise from the industry leader. Jamie Dimon's earlier 'hurricane' comment notwithstanding, it is likely that JPMorgan did better than expected in the core commercial banking side of the business.
Why the Downbeat Sentiment on Bank Stocks?
Given the cyclical orientation of the banking business, they remain vulnerable to the rising recession risks to the economy. We don't think a recession is imminent, but the fear is that a prolonged and aggressive Fed tightening cycle will push the U.S. economy into a recession. This risk is showing up in the flattening yield curve, with the yield difference (or spread) between 2- and 10-year treasury bonds steadily coming down and at times threatening to 'invert'.
I wouldn't repeat why yield curve inversions are scary things and why it's useful for all of us to keep a close eye on the risk of such a development. But I do want to point out here that I am sympathetic to the view that the current yield curve and its signaling power about future economic growth may not be fully comparable to historical periods as a result of the Fed's extraordinary QE policies since the global financial crisis.
Irrespective of this plausible but otherwise minority view of the yield inversion, they are a net negative for the growth outlook. This, coupled with elevated oil prices and the geopolitical uncertainty resulting from the Ukraine war, appear to be weighing on bank stocks lately.
As is typically the case, the sentiment shift on banks has likely overshot to the downside, as the economy still remains strong even though recessionary risks have increased from very depressed levels.
We see the bank stocks as attractively positioned currently on valuation grounds as well.
The group is currently trading at 53% of the S&P 500 multiple, which compares to a 15-year high of 132%, a low of 48% and a median of 70%.
Q2 Earnings Season Scorecard
The bank results won't be the first Q2 results since we count earnings releases for the fiscal quarter ending in May as part of the 2022 Q2 tally as well. On that count, we already acknowledge such Q2 results from 18 S&P 500 members as already out. These include bellwether operators like FedEx, Adobe, Costco and others.
For these 18 index members that have reported Q2 results already, total earnings are up +7.4% from the same period last year on +11.2% higher revenues, with 77,8% beating EPS estimates and 72.2% beating revenue estimates.
It is likely premature to draw any conclusions from this small and unrepresentative sample, but it nevertheless gives us a good sense of the ongoing margin pressures. As you can see, year-over-year revenue growth of +11.2% for these 18 index members has not been enough to produce comparable bottom-line growth. Also, revenue beats percentages are tracking on the low side at this stage.
We will see if these early trends remain in place as we enter the Q2 reporting cycle in earnest this week. We have 16 S&P 500 members on deck to report quarterly results this week. In addition to JPMorgan and Citigroup mentioned earlier, we have Morgan Stanley and Wells Fargo reporting results this week. This week's docket is geared toward the Finance sector, but we do have Pepsi and Delta Air Lines also reporting results.
The Current Earnings Backdrop
Please note that the +2.1% earnings growth expected in 2022 Q2 is solely due to strong gains in the Energy sector. On an ex-Energy basis, Q2 earnings growth drops to a decline of -5.8%.
For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>> How Much Clarity will the Q2 Earnings Season Provide
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Our 5 best-performing strategies have blown away the S&P's impressive +28.8% gain in 2021. Amazingly, they soared +40.3%, +48.2%, +67.6%, +94.4%, and +95.3%. Today you can access their live picks without cost or obligation.
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Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.