Earnings Outlook: Regional Banks Head Earnings Parade This Week

Summary

• Markets faced tough tests last week, including a tough CPI print, hot hostilities between Israel and Hamas, and the start of Q3 earnings season. They emerged largely unscathed.
• This supports our view that as long as the economy remains vigorous and unemployment low, equities are unlikely to sell off sharply – although a significant rally is unlikely given uncertainty about the rate outlook.
• Between risks of an escalation in Middle East hostilities and some 11 speeches by Fed members, markets may be jittery.
• Some 75 companies report this week. Regional banks are likely to be a key focal point given the ongoing fallout from the Silicon Valley Bank collapse and the sharp rise in 10Y yields. Netflix (NFLX) is the other big name of the week.

Market Implications

• We continue to like a technical overweight in the consumer staples ETF XLP, PepsiCo (PEP) and Coca-Cola (KO) in particular.

What We Learned Last Week

Markets underwent several tests last week: a harder-than-expected CPI read; major conflict in the Middle East; the start of Q3 earnings season. And equities ended the week little changed.

Earnings provided useful colour about the evolving macro picture.

Fastenal (FAST), maker of nuts and bolts and all types of fasteners that industrial companies need to make stuff, surprised on the upside, reporting EPS of $0.52 versus $0.50 consensus. In recent quarters, FAST has disappointed on revenue and earnings, largely because its customers were running down excess inventories accumulated as a hedge against supply chain interruptions. Those issues – while not fully resolved – are finally passing.

Delta Airlines (DAL) said demand for domestic and international travel remains strong. The Hollywood and UAW strikes have affected business travel, but these are temporary impediments.

There has been concern about how rising rates will affect the banking industry, but at least the major banks are doing fine, including JP Morgan Chase (JPM), CitiGroup (C) and Wells Fargo (WFC), as interest income outruns interest expense.

We are now about 12% into earnings season, and earnings beats are now running about 9% for the S&P 500. Obviously, it is still early, but it seems earnings will keep a floor under equities even if it may be difficult to rally much given uncertainty about the Fed outlook.

The picture so far is one of an ongoing robust economy, which should also support a floor under equity valuations.

The Week Ahead

Markets will remain on edge over possible escalation of the Israel-Hamas conflict beyond the immediate region. However, it currently appears major international effort is being made to avert a worst-case scenario.

Also on deck is a bevy of some 11 speeches by various Fed members, which will be closely parsed for clues about Fed policy in coming months and quarters. Expect some volatility as their various remarks hit the tape – especially if anyone appears to be signalling a shift in their views. 

Some 85 companies across the sector spectrum in our Russell 1000 universe report this week. Perhaps of greatest interest will be regional banks, which are still trying to recover from the Silicon Valley Bank collapse, and Netflix.  Among them:

Tuesday

• Bank of America (BAC)
• Goldman Sachs (GS)
• United Airlines UAL)

Wednesday

• Alcoa (AA)
• Citizens Financial (CFG)
• JB Hunt Transportation (JBHT)
• M&T Bank Corp (MTB)
• Netflix (NFLX)
• Procter & Gamble (PG)
• US Bancorp (USB)

Thursday

• CSX Corp (CSX)
• Fifth Third Bank (FITB)
• KeyCorp (KEY)
• Tesla (TSLA)
• Union Pacific (UNP)

Friday

• American Airlines (*AA)
• Comerica (CMA)
• Huntington Bancshares (HBAN)
• Manpowergroup Inc (MAN)
• Regions Financial (RF)
• Schlumberger Ltd. (SLB)

Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)