What Big Bank Earnings Are Saying About The Economy, Market

Following a big beat by Morgan Stanley MS Thursday, most of the largest U.S. banks have now reported their fourth-quarter numbers. Investors saw a mixed bag from bank stocks this quarter, a trend that may carry over to the remainder of earnings season.

Here’s a look at how the market has reacted to big bank earnings this week:

• Morgan Stanley is up 7.3%.
• Citigroup Inc C is up 3.3%.
• Goldman Sachs Group Inc GS is up 2.1%.
• JPMorgan Chase & Co. JPM is up 1.1%.
• Bank of America Corp BAC is up 0.3%.
• Wells Fargo & Co WFC is down 7.7%.

Overall, about one-third of the S&P 500’s finance sector’s market cap has already reported earnings.

Earnings for the sector are down an average of 2.2% from a year ago and revenue is up an average of 4.2% so far. Most companies are beating consensus expectations, with 66.7% beating EPS estimates and 74.2% beating sales estimates.

Why Bank Earnings Matter

Banks typically kick off earnings season in the U.S., and their numbers tell investors a lot about what to expect for the economy and the rest of the market.

Learning Markets founder and analyst John Jagerson recently said earnings from money center banks, such as Citigroup and JPMorgan, are particularly important.

“One thing we can do to help better understand stock valuations and the health of the broader economy is look at earnings from our money-center banks,” he said. 

Historically, about 70% of these big banks tend to report earnings beats in any given quarter, Jagerson said.

A lower percentage of beats could be an indication that business and mortgage lending is slowing, a potential leading indicator for the entire economy, he said. 

"If any of that starts slowing or businesses worry that it will slow, it shows up in the banks because financing is at the very start of those other economic activities."

Keeping Perspective

TD Ameritrade chief market strategist JJ Kinahan said this week that investors need to keep big bank earnings declines in perspective.

“They’re comparing fourth-quarter results to their results from fourth-quarter 2018, back when they were still banking profit from the tax legislation that took effect at the start of 2018. Now they face tough comparisons vs. that period, but earnings throughout 2018 reflected in part a one-time boost.” 

Benzinga’s Take

With the S&P 500 already up 26% in the past year, investors have a right to be concerned about whether a mixed earnings season from bank stocks is good enough to keep the rally going at this point.

Since the financial crisis in 2008, in quarters in which more than 30% of big banks and investment companies missed consensus earnings expectations, the S&P 500 declined by an average of 7% over the following 60 days, Jagerson said. 

Do you agree or disagree with these predictions? Email feedback@benzinga.com with your thoughts.

Related Links:

Here's How Much Investing $100 In Morgan Stanley Stock Back In 2010 Would Be Worth Today

Here's How Much Investing $100 In Goldman Sachs Stock Back In 2010 Would Be Worth Today