Can revenue reports push bank stocks up?

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The banks' shares enthusiastically took part in the market rebound after Christmas, but they remained a small share of the market last year. The chart below shows the stock market performance of the Zacks large banking sector, which includes the major space players, compared to the S & P 500 index of 2018.

Citigroup (C) kicks off Monday's Q4 earnings season for the group, followed by JPMorgan (JPM) and Wells Fargo (WFC) on Tuesday, Jan. 15. A host of industry players including Goldman Sachs (GS) and Morgan Stanley (MS), a number of regional players and asset managers are also about to get results this week. In total, we will have the fourth quarter results of more than 60 companies this week, including 34 members of the S & P 500.

The question is whether these quarterly results can serve as a catalyst for bank stocks.

To answer this question, we must keep in mind that the problem of these actions was not a lack of operational performance, but rather an overall uncertainty. On most key operational indicators, banks performed very well in the first three quarters of the year and most of these favorable trends will also be reflected in the fourth quarter results.

The main market concerns for banks include the flattening of the yield curve and the risk of reversal that will affect the health of the economy beyond 2019. The openness of the Fed to a change rhythm in recent days is essentially an acknowledgment of the same end-of-cycle discourse. Do not forget that banks are cyclical companies engaged in lending and other activities such as investment banking, money management and trading that are still at the mercy of the business cycle. Banks not only experience low demand for services when the business cycle collapses, but the quality of its existing assets (its loan portfolio) also decreases as the credit profiles of its customers weaken.

Even if we do not take into account other market concerns, such as trade uncertainty, global growth and political problems, it is this end-of-cycle concern that weighs heavily on banks' sentiment. That said, it is reasonable to expect that already low valuations will lead to strong results, which will give many of these stocks a big boost in the short term. But a fundamental reassessment may not be possible before global concerns are dispelled.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "How much will the estimates go down?"data-reactid =" 34 ">How much will the estimates go down?

Earnings estimates for Q4 2018 and FY 2019 have declined recently, but they probably have more room for maneuver given the headwinds. The chart below shows the evolution of estimates for the fourth quarter of 2018 since the beginning of the quarter.

The story continues

Fourth quarter estimates reduced for 16 Zacks, with the largest negative revisions for the conglomerate, construction, energy, consumer discretionary, utilities and materials sectors .

This is not the first time that estimates have been reduced in this way. However, the magnitude of negative revisions is greater than that observed during comparable periods in the previous four quarters.

Please note that the trend of negative revisions is not limited to Q4 estimates, as forecasts for 2019 have started to drop significantly in recent times, as shown in the graph below.

This chart follows consensus earnings growth forecasts for the S & P 500 Index since the beginning of the second half of the year. As you can see, the estimates remained unchanged in the September quarter, but their downward trend has been consistent since the beginning of October. Many in the market suspect that estimates have yet to fall before stabilizing.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Dashboard of the Q4 earnings season (as of 11 January 2019) "data-reactid =" 76 ">Dashboard of the Q4 earnings season (as of January 11, 2019)

Citigroup's Monday publication will focus on the Q4 earnings season for the market. But the reporting cycle has officially begun already, with the results of 20 companies of the S & P 500 already released. Each of these 20 companies has released its results for the November quarter of its fiscal year, which we record in the December count. As mentioned earlier, we have 34 other members of the index reporting results this week.

The total fourth-quarter earnings of those 20 index members who have already released earnings are up 17% over the same period last year, with revenues up 10%. , 7%, 80% on earnings per share estimates and 65% on revenue estimates.

The pace of earnings growth and the proportion of surprises relative to EPS positive for these 20 members of the S & P 500 Index are lower than what we had seen from the same group of companies in the previous earnings season, such as show the comparison graphs below.

For the whole of the fourth quarter, the total profit of the S & P 500 index should increase by + 10.5% compared to the same period of the previous year, by + 5.3%, which would follow earnings growth of + 25.7% on + 8.4% of 2018 Q3.

Earnings growth is expected to be double-digit for 7 of the 16 Zacks sectors, with the strongest growth in the energy (+ 64.7%), financial (+ 18.6%), construction (+ 26.3%) and transport (+ 22.5%). Profits in the technology sector are expected to decelerate sharply in the fourth quarter, up + 3.7% after two consecutive quarters of very strong growth. The pace of growth in the technology sector has experienced the biggest slowdown in recent days as analysts have adjusted their estimates downward as a result of Apple's prior statement.

In the third quarter, third-quarter profits should be lower, namely conglomerates (-13.1%), automobiles (-13.8%) and utilities (-6.3%).

The table below presents the summary table for the fourth quarter, compared to what was done in the previous earnings season.

The chart below shows the fourth-quarter earnings and revenue growth forecast relative to the next three quarters and actual results for the four previous quarters. As you can see in the chart below, the pace of growth should slow significantly compared to what we experienced in the first three quarters of the year.

The chart below shows the same data over a rolling four-quarter period.

Whether we look at growth on a quarterly or slippery basis, there is no doubt that the growth spurt is now behind us. The question now is how many estimates for the next quarters are to fall further. And the answer to this question will depend on the changing economic context we discussed at the beginning.

For more details on the overall results situation, the fourth quarter earnings season and forecasts for future periods, see our weekly report on earnings trends.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Note: Sheraz Mian manages the Zacks Equity Research Department. He is a recognized profit expert whose comments and analysis are published on Zacks.com and in print and electronic media. His articles on weekly earnings include Earnings trends and Overview of earnings."data-reactid =" 152 ">Note: Sheraz Mian manages the Zacks Equity Research Department. He is a recognized profit expert whose comments and analysis are published on Zacks.com and in print and electronic media. His articles on weekly earnings include Earnings trends and Overview of earnings.

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