Major Banks Will Report Earnings This Week. Here's What To Look For.

Monday, 11 Apr 2022 8:00 AM EDT

This will be a shortened week on Wall Street due to the Good Friday holiday, but the corporate earnings season will get started with some of the biggest U.S. banks to report their Q1 2022 results. This earnings season will determine whether the stock market can go higher. The market has been pricing in a slowdown in earnings (due to tough year-over-year comparisons, high costs, slowing demands, ...). If indeed the companies' reports are bad, I argue we may see a sell-off but not much (again, because market has been expecting bad). However, if the companies' reports show still strong growth, I believe the market will advance to new highs relatively soon. 

Both of our stocks in the financial sector are slated to report this week. Let's quickly discuss what to expect from each one, what we might do in terms of trading them, and also compare to other financial stocks which will also report.

Money-Center Banks

The Bad - JPMorgan Chase (JPM) is set to report before the bell on Wednesday and will host an investor call at 8:30 a.m. EDT. We don't own JPM but because this is the first major bank to report, how it trades after the print will certainly affect our holdings. 

• Last quarter: JPM warned it expected higher expenses would hinder companywide returns going forward.

• This quarter: Analysts polled by Refinitiv expect first-quarter earnings per share to come down by about 40% on a year-over-year basis. We feel this is too pessimistic and hope the company can demonstrate it's not going to be that bad.

• Another thing to be watching is how big of a hit did the Ukraine-Russia-related market turmoil affect US banks. 

• Investment banking fees from trading and activities like IPOs should be lower this quarter, but the main focus should be how exactly will rising interest rates boost earnings.

The Good - Wells Fargo (WFC) is set to post first-quarter results Thursday before the bell and will host an investor call 10 a.m. EDT. We own shares of WFC.

• Last quarter: WFC reported an earnings jump, as revenue beat analyst expectations.

• This quarter: Wells Fargo earnings per share are expected to decline by more than 20% on a year-over-year basis, according to Refinitiv.

• Wells Fargo came into the year as many analysts’ top stock pick for one main reason: it’s considered a big beneficiary of rising interest rates. Analysts will want to see just how much the rise in rates this year has flowed to the bottom line, and what management thinks about the expected hikes later this year. The good thing is that we didn't hear management warning of high operational expenses, the problem that has made the stock of JPMorgan (JPM) miserable since it reported earnings last quarter.

• WFC shares are trading at about 12.3x 2022 estimated EPS of $3.97 (FactSet). We would look at how this 2022 estimate will change after WFC reports, and value the stock based on the same 12.3x multiple.  

Investment Banking

The Good - Morgan Stanley is slated to report earnings before the bell on Thursday, followed by an investor call at 8:30 a.m. ET

• Last quarter: MS reported better-than-expected quarterly earnings, sending the stock up 1.8% on the day.

• This quarter: Morgan Stanley is expected to report an earnings-per-share decline of nearly 20% on a year-over-year basis, according to Refinitiv.

• Analysts have sharply lowered EPS estimates for Morgan Stanley as the investment banking side from trading, IPOs and merger& acquisitions have slowed down meaningfully due to recent weakness in the stock market. We are hoping that they have been too pessimistic, and that Morgan Stanley will show the analysts are wrong 

• MS shares are trading at about 11.5x 2022 estimated EPS of $7.30 (FactSet). We would look at how this 2022 estimate will change after MS reports, and value the stock based on the same 11.5x multiple.  

• Remember, our investment thesis in Morgan Stanley is predicated on their sustainable recurring revenue such as wealth management. This is about the right time for the company to reward us with our patience. We would argue for a multiple higher than 11.5x, if the recurring revenue theme becomes the star of the show.

The Bad - Goldman Sachs is set to report before the bell on Thursday, with an investor call scheduled for 9:30 a.m. ET.

• Last quarter: GS shares slid 7% as surging expenses and an equities trading revenue slowdown led to weaker-than-expected earnings.

• This quarter: Analysts expect earnings to fall by more than 50% on a year-over-year basis, along with a 31% revenue slowdown, according to Refinitiv.

• Goldman Sachs is most exposed to trading and investment banking, so it’s understandable that shares are off about 16% this year amid stock market turmoil. The quarter will be a test for how much GS has come amid CEO David Solomon’s push to diversify earnings towards more recurring revenue (like MS). 

Bottom Line

You see us broke down the financials into two groups, money-center banks (JPM, WFC) and investment banks (MS, GS), and within each group, we assessed the good and the bad. Our picks of WFC and JPM deserve to be the goods because despite an overall decrease for the financial sector, our picks have decreased less than the bad ones like JPM or GS. However, these companies do trade together because of many ETFs and bots that they are involved in, therefore, you need to use that as an investing edge. Specifically, if MS beats and raises, yet it trades down because GS posts a bad quarter which takes the whole financial sector down, then you should use that as an opportunity to buy MS shares.