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Zacks Earnings Trends Highlights: JPMorgan, Wells Fargo, Bank of America, Citigroup and Goldman

Zacks Equity Research

For Immediate Release

Chicago, IL – January 24, 2019 – Zacks Director of Research Sheraz Mian says, The picture emerging from the Q4 earnings season is one of steady improvement in the overall picture, with an above-average proportion of companies beating top-line expectations and estimates for the current and coming periods holding up.”

Q4 Results Show Improving Earnings Picture

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 picture emerging from the Q4 earnings season is one of steady improvement in the overall picture, with an above-average proportion of companies beating top-line expectations and estimates for the current and coming periods holding up. 

  • For the 75 S&P 500 members that have reported Q4 results already, total earnings (or aggregate net income) are down -1.3% from the same period last year on +3.2% higher revenues, with 69.3% beating EPS estimates and 72.0% beating revenue estimates.

  • While the proportion of companies beating Q4 EPS estimates is tracking below what we had seen from this same group of 75 index members, the revenue beats percentage is notably above historical periods.

  • For the Finance sector, we now have Q4 results from 44.6% of the sector’s market capitalization in the S&P 500 index. Total earnings for these Finance sector companies are up 0.9% from the same period last year on +5.8% higher revenues, with 64.3% beating EPS estimates and 82.1% beating revenue estimates.

  • A bigger proportion of the banks are unable to beat EPS estimates thus far, likely indicating that earnings estimates, particularly for banks, may have been on the high side.

  • For Q4 as a whole, total earnings or aggregate net income for the S&P 500 index are expected to be down -3.0% from the same period last year on +3.7% higher revenues, with the Energy sector as a big drag on growth.

  • Energy sector earnings are expected to be down -47.1% from the same period last year on -4.5% lower revenues. Excluding the Energy sector, total earnings for the index would be up +0.2%.

  • Sectors with weak growth in Q4, besides Energy, include Autos (-59.1%), Basic Materials (-23.3%), Aerospace (-19.7%), Industrial Products (-5.2%), Retails (-6.9%), Tech (-4.2%), and Transportation (-5.0%). Q4 earnings are expected to be below the year-earlier level for 9 of the 16 Zacks sectors. 

  • Sectors with positive earnings growth in Q4 include Utilities (+15.4%), Business Services (+10.1%), Finance (+12.6%), and Medical (+3.6%).

  • Positive Finance sector (+12.6% earnings growth on +8.3% revenue growth) is a big help to the aggregate growth picture for the index. Excluding Finance sector, total Q4 earnings for the rest of the S&P 500 index would be down -6.6%.

  • The Finance sector’s favorable growth picture in Q4 is solely because of easy comparisons in the insurance industry, with earnings for the industry expected to be up +35.4%. Excluding the Insurance industry, the Finance sector’s Q4 earnings growth drops to -7.4% (+12.6% with Insurance). 

  • For the small-cap S&P 600 index, we now have Q4 results from 48 index members. Total earnings for these small-cap companies are down -3.2% from the same period last year on +3.5% higher revenues, with 70.8% beating EPS estimates and 64.6% beating revenue estimates.

  • For Q4 as a whole for the small-cap index, total earnings are expected to be down -3.1% from the same period last year on +0.7% higher revenues, with strong growth in the Finance sector helping offset the Energy sector drag.

  • Excluding the Finance sector, S&P 600 earnings would be down -22.5% in Q4. But had it not been for the Energy sector drag, Q4 earnings would be down only -1.2%. 

  • Total 2019 earnings or aggregate net income for the S&P 500 index are expected to be down -1.8% on +2.9% higher revenues, which would follow the +23.2% earnings growth on +9.3% higher revenues in 2018. Growth is expected to resume in 2020, with earnings growth of +8.2% on +4.3% higher revenues.

  • The implied ‘EPS’ for the index, calculated using current 2019 P/E of 20.9X and index close, as of January 22nd, is $158.93, modestly down from $161.85 in 2018. Using the same methodology, the index ‘EPS’ works out to $171.86 for 2020 (P/E of 19.3X). The multiples for 2019 and 2020 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.

  • Worries about the duration of the current economic cycle are not reflected in consensus earnings estimates for next year and beyond, with the 2019 growth challenge primarily a function of tough comparisons to last year’s tax-cut driven record earnings.

Q4 Earnings Season Scorecard(as of January 23rd, 2020)

We now have Q4 results from 75 S&P 500 members that combined account for 19.4% of the index’s total market capitalization. Total earnings for these 75 index members are down -1.3% from the same period last year on +3.2% higher revenues, with 69.3% beating EPS estimates and 72.0% beating revenue estimates.

The results thus far are still dominated by the Finance sector, with the big banks providing a mixed picture at best. JPMorgan JPM came out with stellar numbers, beating estimates and achieving year-over-year growth rates of +20.6% and +8.5% in earnings and revenues, respectively. But Wells Fargo WFC had another sub-par showing and even the Bank of America BAC, Citigroup C and Goldman Sachs GS reports were at best OK.

Expectations for the Quarter

The earnings growth trend established in the first three quarters of the year is not expected to change in the last quarter of the year, with tough comparisons to the year-earlier period weighing on growth.

For Q4, total earnings for the S&P 500 index are currently expected to be down -3.0% on +3.7% higher revenues, with 9 of the 16 Zacks sectors expected to have lower earnings relative to the year-earlier period.

The chart below of quarterly year-over-year earnings growth for the S&P 500 index shows estimates for Q4 and the following 4 quarters and actual results for the preceding 4 quarters.

Earnings growth was essentially flat in the first two quarters of the year, fell -1.7% in Q3, and is expected to be down -3.0% in Q4. This is expected to change as we turn the page on 2019 given the tough comparisons to tax-boosted earnings in 2018, with growth resuming in 2020 Q1, as the above chart shows. 

The market appears to have accepted the deceleration in growth this year in the hope that growth resumes from next year onwards.

The key issue will be if expectations for next year remain stable or start coming down as we move through the remainder of the year. Analysts have not made any significant revisions to their estimates in response to the ongoing trade dispute, likely in the hope that the issue will eventually get resolved. This, coupled with the ongoing economic weakness in Europe, China and elsewhere likely represent downside risks to the growth outlook. 

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