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Earnings Watch: US financials surprise and next week’s earnings
Peter Garnry
Chief Investment Strategist
Summary: Q3 earnings from US banks JPMorgan Chase, Wells Fargo, and Citigroup have all surprised to upside on both the top and bottom line lifting market sentiment. The three most important earnings releases to watch next week are Tesla, Netflix, and ASML that are reporting on Wednesday. Especially, earnings from Tesla are going to be crucial for market sentiment given the weakness in Q3 deliveries and BYD close to overtaking Tesla as the EV leader.
Key points in this equity note:
- US banks are showing strong net revenue and net income growth due to higher interest rates and lower than previously expected growth in provisions for credit losses. The unified message is also that the US economy is getting impacted from higher interest rates but remains resilient.
- BlackRock disappoints on Q3 results as net inflow is significantly lower than estimates and clients are pulling from long-term funds into cash and money-market funds for the first time since 2020.
- The key earnings releases to watch next week are Tesla, Netflix, and ASML that are all reporting on Wednesday.
Strong earnings from US financials
Ahead of the US market open we have got Q3 earnings results from JPMorgan Chase, Wells Fargo, Citigroup, and BlackRock. Here are the main takeaways from these earnings releases:
JPMorgan Chase
- Results: Better-than-expected Q3 top and bottom line against estimates with net revenue growth of 21% or 15% excluding the First Republic acquisition and net income growth of 35% or 24% excluding First Republic. Return on equity was 18% in Q3 vs 16% expected reflecting superior operating performance. The bank is also lifting its FY23 guidance.
- Market reaction: Positive reaction in pre-market session
- Quote: “Currently, U.S. consumers and businesses generally remain healthy, although, consumers are spending down their excess cash buffers. However, persistently tight labor markets as well as extremely high government debt levels with the largest peacetime fiscal deficits ever are increasing the risks that inflation remains elevated and that interest rates rise further from here.”
Wells Fargo
- Results: Both net revenue and net income beat expectations driven by higher net interest margin and lower provisions for credit losses relative to estimates. Wells Fargo is also raising FY23 guidance on non-interest expenses.
- Market reaction: Positive reaction in pre-market session
- Quote: “While the economy has continued to be resilient, we are seeing the impact of the slowing economy with loan balances declining and charge-offs continuing to deteriorate modestly.”
Citigroup
- Results: Top and bottom line beat expectations with growth across all five core businesses and a positive surprise in the FICC (fixed-income, currencies, and commodities) sales & trading segment. The bank is also lifting its FY23 net-interest-income excluding markets.
- Market reaction: Positive reaction in pre-market session
- Quote: “Banking activity played to our mix and grew 17%, bolstered by a rebound in debt issuance and some signs of life in the equity capital markets. U.S. Personal Banking also had double-digit revenue growth while a continued deceleration in spending indicates an increasingly cautious consumer.”
BlackRock
- Results: Asset-under-management hit $9.1trn vs est. $9.23trn due to less net inflow than expected. Q3 adjusted EPS beat estimates while Q3 revenue is in line with expectations. The key headline is that clients have pulled $13bn from long-term funds for the first time since 2020 in a sign that clients are shifting to cash and money-market funds.
- Market reaction: Indicated lower in pre-market session
- Quote: “For the first time in nearly two decades, clients are earning a real return in cash and can wait for more policy and market certainty before re-risking. This dynamic weighed on industry and BlackRock third quarter flows.”
Next week's earnings: Tesla, Netflix, and ASML
The most important earnings releases to watch are Tesla, Netflix, and ASML which are all reporting on Wednesday.
ASML reports before the European market opens with analysts expecting revenue growth of 16% y/y and modest 10% growth in EBITDA. The key focus for investors is sales and outlook for its EUV machines which are used for advanced microchip production. In general, many analysts are a bit lukewarm on the stock until 2H 2024 when there is more visibility on the business and underlying demand drivers. The key risks are still related to potential export bans into China from both the US and Europe.
Tesla reports after the US market close on Wednesday and already now we know that the Q3 delivery figures of 435,059 were lower than Q2 delivery figures of 466,140 suggesting demand is weakening due to higher interest rates on car loans. Q3 production was 430,488 vs est. 461,992 due to planned factory upgrades. The earnings release is going to be key for sentiment in US technology stocks so this is a must watch earnings releases. The recent weakness in China, BYD’s trajectory to overtake Tesla as the leading EV maker, and Tesla being the center of the EU’s probe into Chinese EV production the risks are rising for Tesla shareholders.
Netflix also reports Wednesday after the US market close with analysts expecting Q3 revenue growth to increase to 8% from 3% in Q2 as price hikes, better content, the new advertising business, and crackdown on password sharing are all factors contributing positively to higher growth in both revenue and earnings.