US bank earnings look ahead

US bank earnings take their traditional place at the head of reporting season, with the recent tax reform changes resulting in some one-off charges. Nonetheless, the strong performance of the sector looks to continue. 

Goldman Sachs
Source: Bloomberg

Bank earnings this season will come with an extra dose of uncertainty, as the tax reforms of President Donald Trump prompt the big US institutions to announce special charges that will hit profits.

The big five banks are forecast to report a hit of about $31 billion to their earnings this time around, but in the longer term we should see these losses recouped. However, the sector will likely spend time explaining the impact of the changes, which may well skew core earnings, as banks write down the value of their deferred tax assets and pay one-off taxes on earnings from foreign sources.

In the longer term, we should expect lower taxes to boost earnings, with Bernstein analysts expecting a boost of 15% to performance on average in 2019.

Moving away from tax reform, banks are expected to report a drop in earnings of around 6%, even as revenues rise by over 5%. The third quarter (Q3) saw a 6.5% rise in earnings, which in itself was down on Q2’s 10%. Thus, we should look out for any improvement that suggests either that earnings were better than forecast, or even that the downward trend of the past two quarters has been reversed.

Banks have comfortably outperformed the S&P 500 since the election of Donald Trump, as can be seen in the graph below:

JPMorgan (quarterly earnings 12 January)

The trend here for JPMorgan has been relentless for almost two years. A new all-time high has been hit already this year. We look for signs of a broader pullback for a more attractive entry point, but even in the intraday time frames, dips continue to be bought. November’s pullback found support at the 50-day simple moving average (SMA), which is currently at $103.55.

Citigroup (quarterly earnings 16 January)

Citigroup stock has stuck firmly to its rising trendline since the second half of 2016. As with JPMorgan, the 50-day SMA ($74.14) has acted as support since December, with this current consolidation creating a possible buying opportunity with a view to returning to the recent high at $77.91.

Goldman Sachs (quarterly earnings 17 January)

Goldman Sachs recently broke to a new high, after a December pullback saw the stock move briefly below its 50-day SMA ($247.88), with the post-September uptrend coming into play around $247.70. Further gains will target the 2017 high at $262.16.

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