The second-quarter earnings season is officially underway. Long-time readers know that I’m always excited for earnings season and look forward to it each and every quarter.
To be honest, I’m not sure if the Big Banks felt the same this earnings season. We heard from JPMorgan Chase & Co. (JPM), Morgan Stanley (MS), Wells Fargo Company (WFC) and Citigroup (C) this week, and their latest quarterly results left a lot to be desired.
In fact, JPMorgan’s and Morgan Stanley’s results on Thursday were so disappointing that they threw cold water on the entire market!
For the second quarter, JPM reported earnings of $2.76 per share, down from earnings of $3.78 per share a year ago, on revenue of $30.7 billion. Analysts were expecting earnings of $2.88 per share on revenue of $31.81 billion. So, JPMorgan’s earnings and revenue fell short of analysts’ estimates by 4.2% and 3.5%, respectively. Morgan Stanley announced earnings of $1.39 per share on revenue of $13.13 billion, which missed analysts’ forecasts for earnings of $1.53 per share and revenue of $13.48 billion.
I should also add that both banks’ investing revenue declined sharply – Morgan Stanley’s fell 55% and JPMorgan’s dropped 61% from a year ago – and that hurts their bottom line. JPMorgan also paused its stock-buyback program because the Federal Reserve put a higher capital rule on the banks. Furthermore, JPMorgan had $1.1 billion for its provision of credit losses, including $657 million of net charge-offs and a net reserve build of $428 million, because the bank is huge in the credit-card business and it had expected a certain default rate.
Not surprisingly, both JPM shares and MS shares slipped lower in the wake of their disappointing earnings results on Thursday.
On Friday, Wells Fargo also missed analysts’ expectations for its earnings and revenue in the second quarter. Specifically, Wells Fargo reported earnings of $0.74 per share on revenue of $17 billion, down from earnings of $1.38 and revenue of $20.3 billion in the same quarter of last year. Analysts had projected earnings of $0.86 per share on revenue of $17.53 billion. However, net interest income came in at about $10.2 billion, thanks to higher interest rates. Average loan balances increased 3%, largely due to the uptick in its Commercial Banking segment.
Citigroup, on the other hand, beat the consensus estimate for earnings and revenue in its second quarter – making it the only earnings “winner” this quarter. It reported earnings of $2.19 per share on revenue of $19.6 billion, coming in above the analyst community’s forecasts for earnings of $1.67 per share on revenue of $18.43 billion by 31.1% and 6.3%, respectively. However, earnings were still down 23.2% year-over-year from $2.85 per share. Revenue was up 10% year-over-year.
Like JPMorgan, Citigroup is also halting its stock buybacks for the time being. But unlike JPMorgan and Morgan Stanley, C shares rallied more than 14% on Friday in the wake of its better-than-expected earnings report.
Now, this is a good time for me to remind you that I’m not a fan of the banks, which is why I don’t recommend them in Growth Investor (or any of my other services, for that matter). I used to work for a division of the government that is now part of the Federal Reserve. During my time there, I saw how they essentially “cook their books” – and that scarred me for life.
And even if there weren’t “fudge factors” at the banks, I wouldn’t recommend them anyways because of the inverted yield curve. In the past 10 days, the 10-year Treasury yield has slipped significantly below that of the two-year Treasury. And when the yield curve inverts, it hurts the big banks’ profits over the longer term.
Personally, I’m not surprised by the weak results. According to FactSet, the financial sector is estimated to report a 25.2% year-over-year decline in earnings. They’re also the biggest detractor from the S&P 500’s earnings growth – currently 4.2%. If you exclude the financial sector, the expected earnings growth rate would be 11.2%.
You know which sector is supposed to report strong earnings? Energy.
According to FactSet, analysts have upped the energy sector’s second-quarter earnings estimates by a stunning 42.2%. The energy sector is now expected to achieve average earnings growth of 237.6%.
The higher-than-average oil prices during the quarter are the primary reason why energy companies are on track to post record second-quarter results. FactSet also noted that the energy sector will be the biggest contributor to the S&P 500’s earnings in the latest quarter.
It’s why, in Growth Investor, I’ve taken steps over the past six months to add several energy plays to the Growth Investor Buy Lists for the simple fact that they have incredible forecasted earnings growth. So, even though energy stocks have been hit due to several mini commodity crunches, I do expect them to firm up as the second-quarter earnings season heats up.
The fact of the matter is energy stocks should post record earnings – and will likely continue to do so over the next three quarters.
P.S. Mark your calendar for Friday, July 22. A huge financial event is coming down the pike, one that could turn some stock market investors into millionaires – while bankrupting others.
I believe America is about to enter a “hard turn” that will devastate anyone holding the wrong investments.
These folks will be blindsided, which is why I’m releasing this free presentation. In it, I’ll lay out exactly what is happening, including several key steps every American should take now.
It doesn’t matter if you have $500 or $5 million… I’ll show you how to prepare.
It’s free to watch and by doing so I know you’ll be ahead of everyone else struggling to understand what is really going on.
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
JPMorgan Chase & Co. (JPM)