Zacks Earnings Trends Highlights: JPMorgan, Bank of America and Goldman Sachs

For Immediate Release

Chicago, IL – October 17, 2019 – Zacks Director of Research Sheraz Mian says, "We knew all along that earnings growth would be challenged in Q3, as it had been in the first half of the year, and that’s what these results show."

Solid Start to Q3 Earnings Season

Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Here are the key points:

• The big banks have given us a solid start to the Q3 earnings season, with strength in consumer-facing businesses helping offset an otherwise tough interest rate environment.

• Total earnings for the 43 S&P 500 companies that have reported results already are down -3.8% on +3.7% higher revenues, with 83.7% beating EPS estimates and 60.5% beating revenue estimates.

• For the Finance sector, we now have Q3 results from 36.8% of the sector’s total market cap in the S&P 500 index. Total earnings for these Finance companies are down -2.4% on +2.9% higher revenues, with 85.7% beating EPS estimates and 64.3% beating revenue estimates. This is a notably bigger proportion of positive EPS surprises than we have seen from this group at this stage in recent periods.

• For Q3 as a whole, combining the results that have come out with estimates for the still-to-come companies, total earnings are expected to be down -4.1% on +4.3% higher revenues.

• Q3 earnings growth is expected to be negative for 10 of the 16 Zacks sectors, with double-digit declines for the Energy (-27.8%), Basic Materials (-23.6%), Technology (-11.2%), and Aerospace (-11.1) sectors. Excluding the Technology sector, total Q3 earnings would be down -1.9%.

• Sectors with positive earnings growth in Q3 include Business Services (+7.0%), Transportation (+6.4%), Utilities (+3.9%), Finance (+5.1%) and Construction (+0.9%). Q3 earnings for the index would be down -6.5% on an ex-Finance basis.

• For the small-cap S&P 600 index, total Q3 earnings are expected to be down – 18.9% from the same period last year on +3.1% higher revenues. This would follow declines of -12.6% and -18.3% in 2019 Q2 and Q1, respectively.

• Worries about the duration of the current economic cycle are not reflected in consensus earnings estimates for next year and beyond, with this year’s growth challenge primarily a function of tough comparisons to last year’s tax-cut driven record earnings.

• Total 2019 earnings for the S&P 500 index are expected to be down -0.7% on +2.4% higher revenues, which would follow the +23.1% earnings growth on +9.2% higher revenues in 2018. Growth is expected to resume in 2020, with earnings growth of +9.5% on +5.4% higher revenues.

• The implied ‘EPS’ for the index, calculated using current 2019 P/E of 18.6X and index close, as of October 15th, is $161.07. Using the same methodology, the index ‘EPS’ works out to $176.31 for 2020 (P/E of 17X). The multiples for 2019 and 2020 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.

Q3 Earnings Season Scorecard (as of October 16th, 2019)

We now have Q3 results from 43 S&P 500 members that combined account for 14% of the index’s total market capitalization. Total earnings for these 43 index members are down -3.8% from the same period last year on +3.7% higher revenues, with 83.7% beating EPS estimates and 60.5% beating revenue estimates.

The earnings growth for these 43 index members (-3.8%) is weaker than what we saw from this same Finance-heavy sample of results in the preceding period (+1.7%), but revenue growth is exactly the same that we saw in the preceding period.

We knew all along that earnings growth would be challenged in Q3, as it had been in the first half of the year, and that’s what these results show. That said, a relatively bigger proportion of companies are beating EPS estimates at this stage of the reporting cycle.

For the Finance sector, we now have Q3 results from 36.8% of the sector’s total market cap in the S&P 500 index. Total earnings for these Finance sector companies are down -2.4% from the same period last year on +2.9% higher revenues, with 85.7% beating EPS estimates and 64.3% beating revenue estimates.

The reason why we referred to these Finance sector results as solid is because of the high proportion of these companies that are beating EPS and revenue estimates.

The strength and diversity in the JPMorgan JPM report showed why this company has emerged as the group’s leader. The company reported impressive numbers at both the consumer and investment banking sides of its business, with trading revenues up in double-digits on market share gains on the fixed income side.

The trading business showed decent gains at Bank of America BAC and even Goldman Sachs which has been struggling with this business lately. Goldman had a lot less momentum in its core investment banking business, in contrast to JPMorgan, Citi and Bank of America. Consumer facing businesses stood out at Citi, JPMorgan and Bank of America, with all three showing strong credit card receipts.

On the negative side, net interest margin was down sequentially while loan portfolios were essentially flat.

Overall Expectations for Q3 & Beyond

Earnings growth was essentially flat in the first two quarters of the year, but is expected to be down -4.1% in the current period and in modestly positive territory in the last quarter of the year.

My sense is that actual Q3 growth will most likely be in the vicinity of what we saw in the first half of the year and Q4 earnings growth will most likely turn negative by the time we are closing the books on the Q3 reporting cycle.

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