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Earnings Season Ahead

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  • Wall Street earnings season begins this week
  • JPMorgan, Wells Fargo and Citigroup report Q1 results this Friday
  • Dallas Fed survey shows deterioration in credit action
  • Dow Jones and Russell 2000 with biggest exposure to banking sector

The first quarter of the year has ended so the time has come for the launch of the Wall Street earnings marathon. As usual, big US banks will be the first ones to report financials for the January-March 2023 period. While results will be watched closely, attention may be more focused on accompanying commentary, especially the impact of recent banking collapses on the overall sector. 

Big US banks launch Q1 earnings marathon

Major Wall Street banks will start reporting financial results this week. Citigroup, JPMorgan and Wells Fargo will be the first to report this Friday. All three are expected to show year-over-year revenue growth. While JPMorgan and Wells Fargo are also expected to show decent profit growth, Citigroup is expected to show lower earnings year-over-year. Overall, trends in deposits will be on watch in the aftermath of recent banking turmoil as well as the condition of the struggling commercial real estate sector.

Big, and seen as safe, banks like JPMorgan or Wells Fargo are expected to benefit from recent turmoil as deposits’ flight-to-safety is expected to see capital flow from smaller banks towards larger institutions. 

Friday, April 14 (all before US market open)

  • Citigroup (C.US)
  • JPMorgan (JPM.US)
  • Wells Fargo (WFC.US)

US banks are expected to increase both revenue and profits. Source: Bloomberg, XTB

Fallout from recent banking turmoil

Higher interest rates are generally seen as favorable for banks as they allow them to more easily expand net interest margins. However, it only holds true if banks are prepared for them. Failure to adequately immunize bond portfolios by hedging interest rate risk creates a risk of banks succumbing to losses should they need to quickly access liquidity. This was the case with Silicon Valley Bank (SVB), which was forced to hastily sell bonds and realize huge losses in order to service deposit withdrawals during bank run.

Big banks, like the three that will report this Friday, are less likely to face such problems. However, while rate hikes allow for margin expansion, they also limit demand for loans. Dallas Fed survey on consumer loans showed that credit action sharply deteriorated following the Fed starting to hike rates in early-2022. More recently, volumes took another hit in early-2023 as confidence towards the banking sector dropped in the aftermath of recent collapses. Having said that, comments on how executives’ see the outlook for traditional banking business will be closely watched.

Dallas Fed survey showed that consumer loan volume dropped following recent turmoil in the US banking sector. Source: Dallas Fed

Dow Jones and Russell 2000 on watch

Out of all major Wall Street indices, Dow Jones and Russell 2000 may see the most action in response to banking earnings. This is because the banking sector in those two indices has a much bigger weight than in S&P 500 or Nasdaq. However, Russell 2000 felt more pain during recent banking sector turmoil as troubles were mostly limited to smaller, regional banks. Nevertheless, the impact of this week’s banking sector earnings releases may be more visible on Dow Jones due to characteristics of institutions that will be reporting results (big banks).

Share of banking sector in major Wall Street indices

  • Dow Jones (US30): 17.2%
  • Russell 2000 (US2000): 16.8%
  • S&P 500 (US500): 11.7%
  • Nasdaq: 4.7%
  • Nasdaq-100 (US100): 0.0%

In spite of a smaller share of the banking sector, Russell 2000 is underperforming Dow Jones. This can be reasoned with the fact that Russell 2000 has smaller regional banks as members, which were hit the most during banking turmoil, while Dow Jones has big US banks as its members. Source: Bloomberg

Dow Jones (US30) climbed above the 33,500 pts price zone at the turn of March and April 2023, and the area acted as a support since. A near-term resistance zone to watch can be found ranging around 34,200 pts mark, and is marked with previous price reactions. A test of the area could come this week as US30 currently trades just slightly more than 1% below it. Source: xStation5

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