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Q4 Bank Earnings Preview: Higher Rates, Higher Stakes
Charu Chanana
Chief Investment Strategist
Key points:
- Yield Curve Impact: Banks may benefit from a steeper yield curve, though falling short-term rates in Q4 could have put pressure on net interest income for the quarter.
- Earnings Focus: Key areas to focus on include NII trends, trading revenue, consumer credit health, and 2025 guidance.
- Top Bank Outlook: JPMorgan and Goldman Sachs are expected to lead, while Wells Fargo and Citigroup face lower expectations.
- Valuation Risks: Elevated valuations mean robust earnings and positive guidance are crucial for further stock gains.
As the final quarter of 2023 wraps up, investors are eagerly awaiting a fresh set of earnings reports. Analysts expect the S&P 500 to deliver its highest earnings growth in three years, with FactSet projecting a year-over-year increase of around 10%. If this number holds, it would mark the strongest showing since Q4 2021, when earnings surged over 30%. While expectations are high, the real question is: Will corporate America deliver?
Who’s Set to Shine: Tech, Consumer Discretionary, and Financials
Several sectors are grabbing attention heading into this earnings season. Technology and consumer discretionary stocks may lead the pack, thanks to resilient consumer spending and easing cost pressures. Energy is also in focus, but its earnings growth may moderate after the booming results of previous quarters. On the other hand, defensive sectors like utilities and consumer staples might see muted performance due to tighter profit margins.
Financials, particularly the big banks, kick off the earnings season, and they deserve a deeper dive. Here's what to watch.
Macro Snapshot: How a steeper yield curve impacts banks
A resilient U.S. economy, combined with the potential for looser fiscal policy under Trump 2.0, has reignited inflation concerns. Strong job growth continues to underpin the economy, and expectations for rate cuts in 2025 have tempered, with markets now anticipating only one cut. There’s even renewed speculation about further rate hikes, which has pushed yields higher and steepened the yield curve.
A steeper yield curve generally has a positive impact on bank earnings. Here's why:
- Net Interest Margin (NIM): Banks typically borrow short-term and lend long-term. When the yield curve steepens, the difference between short-term and long-term interest rates increases. This widens the net interest margin, which is the difference between the interest income generated from loans and the interest paid on deposits. A wider NIM usually leads to higher profitability for banks. Additionally, banks often lag in raising deposit rates even if the short-end rates are rising, preserving their net interest margins (NIM).
- Loan Growth: A steeper yield curve can signal economic growth, which often leads to increased demand for loans. As businesses and consumers borrow more, banks can generate more interest income from these loans.
- Investment Income: Banks invest in various securities, and higher long-term yields enhance returns on these investments.
- Risk Management: A steeper yield curve can make it easier for banks to manage interest rate risk. With a clear distinction between short-term and long-term rates, banks can better match their assets and liabilities, reducing the risk of interest rate fluctuations.
What to Watch in Bank Earnings for Q4 2024
- Net Interest Income (NII): With rate cuts of 50bps in September, 25bps in November, and 25bps in December, NII could be under pressure. Watch for:
- Deposit Rates: Aggressive pricing could impact deposit trends.
- Loan Growth: Any signs of sluggish loan growth due to a slowing economic environment.
- Trading and Investment Fees: Rate volatility and strong capital markets in Q4 could boost trading and investment income.
- Consumer Health: Credit card and auto loan portfolios offer key insights into the financial health of consumers.
- Buybacks: Any announcements regarding increased share repurchases or dividends could signal management confidence.
- Guidance and 2025 Outlook: Pay attention to guidance and outlook for 2025, especially with the Federal Reserve slashing rate cut expectations, which could impact future profit growth.
Earnings Expectations by Bank
Wells Fargo (WFC)
- Consensus expectations are low, with a likely large contraction in NII among peers as rates fell.
- Investors will watch for management’s comments on expense control and credit quality.
- After delivering a 43% stock gain in 2024, Wells Fargo faces a high bar for continued outperformance.
JPMorgan Chase (JPM)
- Expected to deliver strong results across NII, capital markets, and asset management.
- Recent comments point to NII slightly above consensus at $22.6 billion (vs. $22.2B expected) with further upside in 2025 NII guidance.
Goldman Sachs (GS)
- Rising investment banking and trading revenue, along with strong markets, could drive a robust quarter.
- Asset and wealth management segments may also deliver meaningful upside.
- As the top-performing bank stock of 2024 (+48%), Goldman may need to beat expectations convincingly to justify its valuation.
Citigroup (C)
- Still in turnaround mode, Citi needs to show tangible progress on expense control and revenue growth.
- Investors will be particularly focused on its 2025 outlook.
- Potential leader in equity trading, likely giving it a tailwind.
Bank of America (BAC)
- Expected EPS growth of 10%, its first quarterly increase in five periods.
- Wealth management fees are likely to be a key driver of the rebound.
Morgan Stanley (MS)
- Benefiting from increased corporate client and sponsor activity.
- Wealth and asset management fees should see a boost from buoyant markets.
- First strategic update since CEO Ted Pick assumed the Chairmanship, making management commentary a key focus.
Summary
This earnings season will set the tone for financial stocks in 2024, but the stakes are high. Even with solid Q4 results, the macro backdrop—characterized by lingering inflation concerns, steeper yields, and recalibrated Fed expectations—may weigh on sentiment. For leading banks like JPMorgan Chase and Goldman Sachs, it’s not just about beating estimates; it’s about providing confident, growth-oriented guidance for 2025.
With valuations already elevated after a strong 2024, further stock gains will require more than just decent earnings. Robust outlooks, ongoing loan demand, and resilient consumer credit will be critical to sustaining investor confidence.
Meanwhile, uncertainty around Fed policy and a potential shift in fiscal priorities under Trump’s new administration will keep markets on edge. Investors will need to navigate carefully, weighing solid earnings against macro risks.