Earnings season is rapidly approaching, and it’s likely to be an important stretch for the equity markets. There’s a lot of good news out there for investors. But over the next few weeks, that good news needs to be buttressed by strong earnings reports from key companies.
Right now, the broad market looks technically sound, as the first two weeks of 2018 have maintained the strength seen for much of last year. Treasury yields continue to hover in the 2.6% range, keeping stocks attractive on a relative basis. And tax reform should help earnings for many (though not necessarily all) companies as the year plays out.
With broad markets up 30%+ just since November 2016, valuation remains a concern, however. Many traders expect volatility to spike as well (though they’ve been waiting for years in some cases).
Nevertheless, the rally can continue this year — but earnings will have to support that rally.
We’re still a week away from the heart of earnings season, but this week should give a preview, particularly in earnings reports from three key companies. Two more major U.S. banks report, following a pair of releases this morning. And a health care stock that’s leading the pack will try and maintain its edge over rivals and a lofty valuation.
Here are the 3 earnings reports to pay close attention to this week. We’re not in the heart of earnings season yet, but these 3 reports should be a good indication of what’s to come.
Earnings Reports to Watch #1: Citigroup
I don’t expect a ton of fireworks from Citigroup Inc (NYSE:C) when it reports on Tuesday morning.
The drivers of sentiment coming out of the fourth-quarter release are going to be similar to those of other major financials. Trading revenue will continue to be weak, for one. Citi’s fixed-income trading revenue dropped 16% in the third quarter. Another double-digit drop looks likely in Q4. On the other hand, consumer and business lending remains reasonably strong. And it should stay that way even coming out of the holiday season.
That split was evident in Friday morning results from peers Wells Fargo & Co (NYSE:WFC) and JPMorgan Chase & Co. (NYSE:JPM). Investors have shrugged in early morning trading, with JPM up 1% and WFC off by less than that. I’d be surprised if Citigroup stock makes a bigger move on Tuesday.
Still, there will be a lot to digest here.
Citi has already tipped a potential $20 billion charge from tax reform, mostly due to non-cash write-downs of deferred tax assets. Investors no doubt will be listening very closely to the post-earnings conference call to understand the details of those charges, and how they will affect Citigroup’s capital ratios and other key regulatory issues. If the news there is good enough, Citi should be able to continue its rally. And it may be able to close the persistent valuation gap between it and peers like JPMorgan.
Earnings Reports to Watch #2: Bank of America
Bank of America Corp (NYSE:BAC) follows Citigroup with its fourth quarter report Wednesday before the bell. And BofA’s numbers will likely have more impact than those of peers. The stock has had a big breakout, gaining 17% just since late November.
Yet there are some underlying concerns here.
First, BofA is facing the same trading revenue weakness as JPMorgan and Citigroup. Second, Bank of America has lost a considerable amount of market share in credit cards over the past decade, much of it to JPM. As a more consumer-dominated bank, that in turn raises worries about long-term growth. Investors might wonder if Bank of America might be stretching its risk profile to keep up with peers. And third, of course, a large mortgage portfolio gives BofA significant exposure to U.S. housing — for better or for worse.
Bank of America probably needs to beat its earnings target to move the stock higher and avoid a repeat of the choppy trading that beset BAC for a good chunk of 2017.
The good news for BAC shareholders is that the company has topped Street consensus on the bottom line for twelve straight quarters. But there’s bad news. With the stock up 33% over the past year and trading just shy of the average analyst target, even another beat may not be enough to drive more upside for Bank of America.
Earnings Reports to Watch: United Healthcare
Dow component UnitedHealth Group Inc (NYSE:UNH) reports on Tuesday morning, and investors will be focused on two things.
First, the company’s updated 2018 guidance. Analysts are looking for 12% EPS growth this year. With UNH trading at 20x that figure, UnitedHealth is going to have to match or beat those projections.
But beyond Street numbers, what should be of interest is the company’s strategic focus. UnitedHealth continues to expand and diversify its business, most recently with two acquisitions. It acquired the medical clinic business of Davita Inc (NYSE:DVA) for $4.9 billion and followed its entry into Brazil by purchasing Chile’s Banmedica for another $2.8 billion.
UnitedHealth is unquestionably the leader in the healthcare space from a strategic and execution standpoint. So analysts and investors will want to hear what’s next. The rest of the industry is just chasing UNH — the merger of CVS Health Corp (NYSE:CVS) and Aetna Inc (NYSE:AET) is a clear effort to catch up — and it’s done wonders for the stock. UNH has tripled in the last four years and almost doubled over the last two.
To maintain that performance, UnitedHealth needs to remind investors why it’s best-in-breed and why those investors should be willing to pay a premium for the stock.
With a lot of good news to offer, and what’s likely an interesting story to tell on the fourth quarter conference call, I expect both the Street and the market will be satisfied. Barring a big surprise, the run in UNH shares should continue coming out of Tuesday’s release.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.