Big banks kick off fourth-quarter earnings season in the coming week, but investors are more interested in their outlooks as the industry faces the prospect of a faster pace of interest rate increases and more deregulation.
Stocks ended the week sharply higher as the Dow Jones Industrial Average advanced 1% for the week but came up just short of touching the 20,000 mark; while the S&P 500 index finished up 1.7%, and the Nasdaq Composite Index rallied 2.6%, both closing at fresh records on Friday, Market Watch reported.
Since banks provided earnings growth in the third quarter—8% earnings growth for the sector compared with 3.1% S&P 500, according to FactSet data—investors are eager to see how banks plan to remain a driver of the economy as well as the stock market.
“The market is going to be expecting leadership going into the first quarter,” said Robert Pavlik, chief market strategist at Boston Private Wealth, in an interview. “But if they get cautious about a higher dollar or a rise in yields, you have to watch out for that.”
Top banks reporting on later this week include Dow component JP Morgan Chase & Co. along with Wells Fargo & Co. and Bank of America Corp.
S&P 500 earnings for the fourth quarter are expected to grow by about 3% from the year-ago period, according to John Butters, senior earnings analyst at FactSet. Probably the biggest boost will come from the financial sector, which is projected to see growth of 13.8%.
That, however, will be helped by comparisons with “unusually low” earnings from both Goldman Sachs Group Inc. and American International Group Inc. in the year-ago quarter, Butters said. Excluding those companies, earnings for the sector is expected to grow 4.4%, he said.
Two key areas to look for in bank earnings are trading revenues and loan growth, Pavlik said. A promise of deregulation by president-elect Donald Trump, if fulfilled, could boost trading activity, while the prospect of a faster pace of rate increases by the Federal Reserve may generate higher loan demand as borrowers seek to lock in interest rates while they are still low.
Another earnings highlight will be Delta Air Lines Inc. given the recent run-up in the Dow Jones Transportation Average which was led in part by airlines.
While the retail sector is not reporting earnings for another few weeks, retailers will be in focus Friday as December retail sales figures are released. Last week, retail stocks took a hit after Kohl’s Corp. and Macy’s Inc. reported a weak holiday season, pressuring shares of traditional retailers and department stores across the board.
