Chief Investment Strategist
Summary: US banks are going into the Q2 earnings season with very low expectations as earnings estimates have not meaningfully recovered since the US regional banking crisis back in March. Wells Fargo, JPMorgan Chase, and Citigroup are all reporting earnings next Friday and the question is whether they can beat estimates. Our view is that the market has gotten too negative on banking stocks and that strong net interest income will surprise investors offsetting the weakness in capital markets.
The Q2 earnings season starts next week with the first real impact on Friday with key earnings from Wells Fargo, JPMorgan Chase, and Citigroup. Forward earnings estimates have recovered for the broader market as investors have lowered their recession probability and the AI hype has lifted general expectations. For US financials this year has been opposite. Coming into 2023 investors were increasing their bets on US and European banking stocks as higher interest rates were expected to significantly increase the net interest margin boosting earnings growth.
However, higher interest rates caused damage to US banks’ balance sheet through unrealized losses on their bond portfolios and moving those bonds from available-for-sale to held-to-maturity have locked US banks into a more conservative position in terms of extending credit and growing the balance sheet. The regional banking crisis that was ignited in March by the failure of Silicon Valley Bank has lifted capital requirements and capital costs for banks and as a result US financials have seen their forward P/E ratio decline relative to the overall equity market. Forward earnings estimates for US financials are down 11% this year have only slightly recovered from the March banking crisis blow.
US banking stocks have been one of the best performing segments over the past week indicating that investors might be positioning themselves for US banks to surprise to the upside on earnings and their outlook. We are also leaning in favour that US banks could surprise in the Q2 earnings season and we think analysts are underestimating the effects from higher net interest margin. According to FDIC the average US 3-month certificate deposit rate was just 1.07%. Ahead of the Q2 earnings season several banking CEOs have talked about tough conditions in their capital markets divisions and as thus the surprise against estimates will be dictated by the degree in which the commercial banking activities and offset that weakness. Forward returns on US banks hinge a lot on whether the US economy slips into a recession or not defined as a sustained uptick in unemployment.
The list below highlights all the most important earnings releases next week.
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Head of Fixed Income Strategy
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Head of Commodity Strategy
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Head of Fixed Income Strategy
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Head of Commodity Strategy
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