Positive Retail Sales and reassuring-enough earnings results from J.P. Morgan (JPM) and Wells Fargo (WFC) provide the backdrop for today’s trading action. The favorable retail reading is particularly notable as it maintains the persistent recent positive momentum in economic reports that has been prompting positive revisions to Q4 GDP estimates. That’s why Friday’s jobs ‘miss’ stands out as such an aberration in recent data flow.
This morning’s positive earnings surprises for J.P. Morgan and Wells Fargo on roughly in-line revenues weren’t that ‘surprising.’ These two are the strongest banking institutions around, though J.P. Morgan has lately been hobbled lately by a slew of regulatory and legal issues.
There weren’t many surprises from either bank, with loan growth remaining tepid and mortgage banking becoming less of an earnings contributor. Investment banking results at JPM showed signs of improvement, potentially providing a positive read-through for Goldman Sachs (GS).
Overall earnings for the sector are expected to be strong, with total earnings following the J.P. Morgan and Wells Fargo results up +22.4% from the same period last year. Easy comparisons, particularly at Bank of America (BAC) and the insurance industry, are driving most of the year-over-year growth. Excluding the Finance sector, total Q4 earnings growth for the S&P 500 drops from +6.7% to +3.5%.
As always, a lot is riding on management guidance given the elevated expectations for earnings growth this year and next. The consensus expectation is for a material ramp-up in earnings growth later this year, which then continues into 2015. But the persistent trend on the estimate revisions front for more than a year now has been on the negative side, with estimates steadily going down.
Investors haven’t been terribly concerned about this lackluster earnings outlook in hopes of a future turnaround. The guidance and pre-announcement trend at this admittedly early stage in the Q4 reporting cycle isn’t different from what we have become used to recent quarters. The question is whether investors will finally start paying attention to the underwhelming earnings fundamentals or continue to hold out hopes for a better tomorrow. It wouldn’t take long to find out.
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