JPMorgan, Bank of America, Goldman Sachs, Morgan Stanley and AIG are part of Zacks Earnings Preview

For Immediate Release

Chicago, IL – January 16, 2017 – Zacks.com releases the list of companies likely to issue earnings surprises. This week’s list includesJPMorgan (NYSE: JPM – Free Report ), Bank of America(NYSE: BAC – Free Report ), Goldman Sachs (NYSE: GS – Free Report ), Morgan Stanley (NYSE: MS – Free Report ) and AIG (NYSE: AIG – Free Report ).

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Solid Start to Q4 Earnings Season

The big banks have given us a strong start to the Q4 earnings season, going some way towards justifying these stocks’ recent momentum, particularly following the election.

A big part of the recent gains for stocks like JPMorgan (NYSE:JPM – Free Report ) : up +23.1% since November 8th), Bank of America(NYSE: BAC – Free Report ) : up +34.8% in that time period) and others reflect market participants’ hopes that the incoming administration will roll back all or most of the regulatory constraints, implement tax reform, and give the U.S. economy’s growth trajectory a positive nudge. But the more tangible catalyst for bank earnings, particularly this earnings season, has been the post-election uptrend in interest rates.

We didn’t really see the full impact of higher interest rates on the banks’ net interest margins in Q4 results. But higher interest rates, increased confidence and the resultant enhanced appetite for risks did juice JPMorgan and Bank of America’s trading revenues. JPMorgan’s trading revenues were up +24% from the year-earlier level, with fixed income trading revenues up +31%. Bank of America showed strong gains in fixed income trading as well, with the bank’s Q4 fixed income trading revenues up +12% from the year-earlier level. This momentum in trading revenues offers favorable read-throughs for Goldman Sachs (NYSE: GS – Free Report ), which reports next week (Jan. 18th) and has a storied trading franchise.Morgan Stanley (NYSE: MS – Free Report ), which reports a day ahead of Goldman, has been reducing its trading business over the last many years.

It is still fairly early, with results from only 5 Finance sector companies in the S&P 500 (out of 90 total) out already, but these 5 companies are the some of the largest in the entire index and account for more than a quarter of the sector’s total market capitalization. Total earnings for these 5 Finance sector companies are up +15.6% from the same period last year on +1.4% higher revenues, with all 5 beating EPS estimates but only 2 beating top-line estimates.

This is better earnings growth than we have seen from the same group of 5 banks in other recent periods, which is having a favorable impact on the aggregate Q4 growth expectation for the sector as a whole. Total Q4 earnings for the Finance sector as a whole, combining the reported actuals with the still-to-come estimates, are expected to be up +17.1% from the same period last year.

Please note that the Major Banks industry, of which JPMorgan, Bank of America 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). The sector’s growth pace for the quarter remains in double-digits even after we adjust for the easy comparisons atAIG (NYSE: AIG – Free Report ). Excluding AIG, the sector’s Q4 earnings would be up +11.7%.

The sector’s earnings are on track to be flat in 2016. But they were expected to be up materially in 2017 and 2018 even before the aforementioned favorable developments.

With a number of policy oriented developments still to unfold after the new administration takes office, it is reasonable expect positive revisions to these expectations. And if that is the case, then bank stocks should continue their momentum. Valuations have no doubt caught up with underlying fundamentals, but they are by no means stretched relative to historical periods, particularly given the emerging interest rate trajectory.

Q4 Expectations As a Whole

For Q4 as a whole, total earnings for the S&P 500 companies are expected to be up +4.2% from the same period last year on +3.8% higher revenues. This would follow the +3.8% growth in Q3 earnings on +2.3% higher revenues, the first instance of positive earnings growth for the index after five quarters of back-to-back declines. Comparisons for the Energy sector, a big driver of the earnings recession, turn positive in Q4, with the sector’s earnings growth turning positive for the first time after 8 quarters of declines.

Note : Sheraz Mian regularly provides earnings analysis on Zacks.com and appears frequently in the print and electronic media. In addition to this Earnings Preview article, he publishes the Zacks Earnings Trends report every week.

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J P Morgan Chase & Co (JPM): Free Stock Analysis Report
 
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American International Group, Inc. (AIG): Free Stock Analysis Report
 
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