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What to watch for in Q2 US bank earnings

Banks enjoyed a good Q1 earnings season, but this time around the picture is more mixed. On a technical view too, the rally in bank shares is facing its most severe challenge so far this year.

US banks are set to report earnings in just under a week, taking their traditional place at the front of the parade of corporate numbers known as ‘earnings season’.

This time there will be several factors to watch out for, as investors attempt to work out whether the massive rally in bank stocks since the US presidential election has further to go.

Has growth peaked for now?

US growth has come storming back since the pandemic, but as the recovery begins to mature we might well see the recent stellar run in gross domestic product (GDP) figures begin to ease back. In part this is to be expected, but it will perhaps call into question some of the rosy assumptions made about growth and earnings.

The first quarter (Q1) was very good for US banks, which means the quarter-on-quarter comparisons may be quite tough. Plus, with the quiet summer now in full swing, investors might be unwilling to put further funds to work in the sector for the time being.

Increasing dividends

While earnings growth might slow, dividends and buybacks are likely to rise. Bad loan loss provisions are being reduced, freeing up cash, and most importantly the Federal Reserve (Fed) has released the handcuffs on dividends and buybacks it imposed at the height of the pandemic.

Even if earnings growth is tapering off, the overall trend should see more cash from earnings and more of that going to shareholders’ pockets via dividends, and higher prices through share buybacks.

Will investment banking activity ease off?

After the excitement of 2020, when trading revenues ballooned, things are expected to calm down. Markets have been relatively quiet, and the VIX continues its decline overall.

Indices have also been calm, with the S&P 500 yet to see a decline of much more than 5% in 2021. At least deal-making revenues will compensate to a degree, as companies look to go back to mergers and acquisitions (M&A) now that the future is more predictable.

What to expect from earnings – technical analysis

Q2 expected revenue Q2 expected earnings per share (EPS)
JPMorgan $29.9 billion $3.09
Goldman Sachs $11.9 billion $9.40
Citigroup $17.6 billion $2.03
Bank of America $22.1 billion $0.80

JPMorgan

JPMorgan’s shares have eased back from the highs seen in June.

The bounce from mid-June has resulted in a lower high, for the time being, just below the 50-day simple moving average (SMA). Fresh declines may well bring the support zone around $146 into view.

Goldman Sachs

The Goldman Sachs shares fell below the rising channel that had formed over the past three months, and continued their decline towards $344.

A bounce created a lower high that also met the lower bound of the previous channel, reinforcing the near-term bearish view. With daily stochastics rolling over it seems the sellers remain in control and a move back to $344 seems likely.

Citigroup

As one of the less impressive performers in price terms this year, it is perhaps not surprising that Citigroup is coming under heavy pressure.

The stock price is now back below the January highs, as it retraces all the gains made since the beginning of the year. The late-June lower high and the likelihood of a fresh lower low seals the bearish view for the time being.

Bank of America

After a lower high at $42.00, the Bank of America shares have headed back to the June low around $38.00, with the April low at $37.24 now coming into view.

A rebound would need to move back above $42.00 to reverse the short-term bearish outlook, and for the time being the uptrend is coming under severe pressure.

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