US bank earnings: modest growth expected

US banks are expected to report modest growth in earnings but as the Fed looks to keep cutting rates, what will drive stock prices higher?

Fed chairman Jerome Powell Source: Bloomberg

US financial stocks are expected to report 1.73% growth in third-quarter (Q3) earnings compared to a year earlier. This is the second best performance for the index, with healthcare coming first with 1.8% growth. By contrast, real estate, materials and energy are all expected to report double-digit declines, and the last of these is forecast to see earnings shrink by almost a third. Overall, S&P 500 earnings are expected to decline by around 4%.

While this is good news for the financial sector, it comes at a time when earnings growth should be much stronger. Lending to non-bank financial companies is healthy and cuts to US interest rates have spurred a burst of remortgaging that has helped boost activity for banks’ consumer lending divisions.

The Federal Reserve's (Fed’s) shift to a rate-cutting cycle also hurts the sector, however. Markets have driven down long-term interest rates in expectation that the Fed will continue to cut rates, hitting income from lending. It seems unlikely that the Fed will go to negative interest rates, at least not yet, but there seems little chance of any increase in interest rates for the foreseeable future.

Expectations for the major US banks, using data from FactSet, are as follows:

EPS estimate Q3 EPS Forecast EPS change Stock returning YTD (excluding dividends)
JPMorgan Chase $2.45 $2.34 5% 17.8%
Bank of America $0.57 $0.66 -13% 15.3%
Citigroup $1.95 $1.73 13% 29.7%
Goldman Sachs $5.13 $6.28 -18% 18.2%
Morgan Stanley $1.13 $1.17 -3% 2.5%

JPMorgan Chase

JPMorgan stock has had a strong year, trending higher since the low in December 2018. Sell-offs in March, May and August have resulted in higher lows that provided good entry points for traders, while investors will have enjoyed the steady push higher. The stock has weakened as the earnings release approaches, but if it finds another low at $110 then strong end-of-year seasonality may kick in and give the stock a run at a fresh high for the year above $119.

JPMorgan chart Source: ProRealTime

JPMorgan chart Source: ProRealTime

Bank of America

This year has been a different story for Bank of America stock. It enjoyed a good rally in Q1, but since mid-March gains above $30 have proven impossible to sustain. Unlike JPMorgan, which has seen higher highs and higher lows, Bank of America has traded in a range – dips to $26 have found buyers and rallies to $30 have then found resistance. If the stock can begin to rally into earnings then another test of the $30 area may result, but a daily close above $31 is needed to signal that a breakout has occurred.

Bank of America chart Source: ProRealTime

Bank of America chart Source: ProRealTime

Citigroup

Citigroup’s stock rallied into May, and was able to create a new higher high in July, but it faltered at $70 in September. However, June and August saw a test of $62 as support, which resulted in a bounce. A possible higher low around $65 would reinforce the idea of strengthening bullish momentum which may lead to a test of $70 and $72.

Citigroup chart Source: ProRealTime

Citigroup chart Source: ProRealTime

Goldman Sachs

Higher lows have been in evidence for Goldman Sachs too since June, with trendline support and the 200-day simple moving average (SMA) at $197.46 coming into play as October began. A bounce from here needs to clear the $220.00 high from July and September to signal a breakout has occurred. $194 has been good support in August and October, so a drop through here would be a bearish development, and would also result in a break below rising trendline support.

Goldman Sachs chart Source: ProRealTime

Goldman Sachs chart Source: ProRealTime

Morgan Stanley (not an all sessions stock)

Morgan Stanley’s chart is a different picture. Since February the stock has defended the $39-$40 area, with dips into this level finding buyers. But since July rallies have been contained around $45, a lower high from April’s peak at $48. The stock risks resuming its downtrend from the 2018 peak if it breaks below $38, which such a move bring the December 2018 low at £36 into play.

Morgan Stanley chart Source: ProRealTime

Morgan Stanley chart Source: ProRealTime


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