Can banking stocks regain their mojo with Q1 results?

JP Morgan JPM and its peers such as Bank of America BAC and Goldman Sachs GS which is set to report first quarter results this week had a great run last year. The Zacks Major Banks industry, which includes JPMorgan and the other money center operators, rose +32% in 2021, better than JPMorgan’s +24.6% gain and the S&P index’s +27.5% 500.

You can see this in the chart below which shows the 2021 calendar year performance of JPMorgan, Bank of America, Goldman Sachs and Zacks Major Banks industry.

Image source: Zacks Investment Research

You can see in the chart that while JPM stocks were second in performance last year, they still outperformed the Zacks Tech sector.

This boost in performance made perfect sense. Yes, there were supply chain bottlenecks and rampant concerns about inflation, but it was all down to a scorching economy that pushed trading and investment banking volumes into territory. record high and raised optimism about loan demand.

More importantly, interest rates were expected to rise, which directly benefited banking stocks through improved margins. Indirectly, the upcoming round of Fed tightening has benefited banking stocks by undermining the appeal of high-multiple, long-duration tech stocks that are generally seen as less attractive in a rising interest rate environment.

What went wrong for bank stocks?

This picture of performance has changed significantly over the year-to-date period, with bank stocks lagging significantly behind the broader market, as shown in the chart below.

Zacks Investment Research
Image source: Zacks Investment Research

We have entered the “post-transitional” phase with respect to the Fed’s inflation outlook which has caused a spike in long-term interest rates. This should have been a catalyst for bank stocks if short-term interest rates had not risen in parallel, causing the yield curve to flatten and momentarily invert.

I won’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 move. But I want to stress here that I am sympathetic to the idea that the current yield curve and its signaling power on future economic growth may not be entirely comparable to historical periods due to the Fed’s extraordinary QE policies since the global financial crisis. .

Regardless of this plausible but otherwise minority view of yield inversion, they are a net negative for growth prospects. This, combined with high oil prices and geopolitical uncertainty resulting from the war in Ukraine, seems to be weighing on banking stocks lately.

As is usually the case, the shift in sentiment towards banks has likely gone overboard as the economy remains strong even as recession risks have risen from very depressed levels.

The group’s short-term profitability is undoubtedly mixed, with increased uncertainty weighing on the investment banking deal flow (M&A and underwriting) and trading volumes facing very difficult comparisons. But management teams say deal pipelines remain strong, suggesting volumes will pick up quickly as the macro environment eases.

We consider banking stocks to be attractively positioned currently based on valuations as well, as the chart below shows the relative 12-month PE multiple for the Zacks Major Banks sector versus the S&P 500 Index.

Zacks Investment Research
Image source: Zacks Investment Research

As you can see, the group is currently trading at 55% of the S&P 500 multiple, which compares to a 5-year high of 60%, a low of 48% and a median of 60%.

Bank profit expectations

For the Zacks Major Banks segment, which includes these major banks and accounts for about 45% of financial sector earnings, first-quarter 2022 earnings are expected to fall -36.2% on revenue down -1.4%. This would follow profit growth of +8.8% on revenue up +6% in the fourth quarter of 2021.

For the finance sector as a whole, total Q1 earnings are expected to decline -19.2% on revenue up +1.9%. The chart below shows first quarter expectations for the constituent industries of the finance sector in the context of what those industries reported in the fourth quarter of 2021 and what is expected for the second quarter of 2022.

Zacks Investment Research
Image source: Zacks Investment Research

It will be interesting to read management’s comments on trends in core banking, particularly loan demand. The group’s first-quarter results are expected to show an acceleration in loan growth, but concern will center on sustainability given the aforementioned flattening of the yield curve. Most of the big banks don’t have much exposure to Russia, unlike Citigroup. Management’s outlook for the yield curve will also be instructive.

The scoreboard for the first quarter 2022 earnings season

The first quarter earnings season will really kick off with the big banks this week releasing March quarter results, but the first reports are already out.

As noted earlier, not all businesses have fiscal periods that correspond to calendar quarters. Last-day quarterly reports from companies with fiscal quarters ending in February will be part of the first-quarter tally. We have already seen such results from 20 S&P 500 members, including FedEx, Nike, Oracle and others.

For the 20 index members who have already released Q1 results, total revenue is up +20.7% compared to the same period last year with revenue up +12.3 %, with 80% overshooting EPS estimates and 85% over revenue estimates.

Not to do too much with these very early results, but the comparison charts below put the Q1 2022 earnings and revenue growth rates for these 20 index members into the context of what we had seen the same group of companies in other recent times.

Zacks Investment Research
Image source: Zacks Investment Research

The comparison charts below show Q1 EPS and revenue percentages for these 20 index members in historical context.

Zacks Investment Research
Image source: Zacks Investment Research

Looking at the first quarter as a whole, with actuals for these 20 index members and estimates for upcoming companies, total earnings are expected to be up +3.5% on revenue in increase of +10%.

Excluding the -19.2% decline in financial sector profits, the index’s growth rate improves to +10.5%. On the other hand, the Energy sector has a very robust earnings profile at present, the sector is expected to generate +204.1% additional earnings compared to the prior year period on revenue in increase of +36.8%. Excluding the strong contribution from the energy sector, earnings for the rest of the index would be down -1.8% on revenues up +8%.

Zacks Investment Research
Image source: Zacks Investment Research

The graph below shows the comparable picture on an annual basis.

Zacks Investment Research
Image source: Zacks Investment Research

For a detailed look at the overall earnings picture, including expectations for future periods, please see our weekly earnings trends report >>>>Are earnings estimates falling?

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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