The Q4 earnings season has started off on the right foot, with major banks having a notably improved profitability picture compared to what earlier periods showed, thus reconfirming reports of the improving earnings outlook forecasted over the last few months.
Despite increasing infection rates and several bumps along the road to widespread vaccination, growing optimism regarding 2021 has been one of the boosts leading to positive bank results. In a combined effort, the three bank giants Citigroup, Wells Fargo, and JPMorgan released over $5 billion in loan loss reserves that they had set aside in the first three quarters of the year to cover loans going bad due to the pandemic.
Despite reserving releases, the banks are in effect saying that they expect economic conditions in the coming quarter to be stronger than originally expected, which translates to good news in all sectors, especially economically sensitive ones.
Over the past three months, bank stocks have clearly been in the lead. Over the past year, JPMorgan shares were up by +0.8% while Citigroup shares lowered by -20.1%, when the S&P 500 was up by +16.2%. However, over the last few months JPMorgan shares saw a +36.4% increase, and Citigroup also enjoyed an impressive +49.6% shares boost compared to the S&P 500 index's +9.5% gain.
This week, the Q4 reporting cycle is also set to accelerate significantly with over 90 companies due to report results including 40 members of S&P 500. As of now, we have Q4 results from 26 S&P 500 members which make up a 5.2% of the index’s total membership. The aggregate net income for these companies was up 7.6% from the same period last year with 1.9% lower revenues. On a positive note, 96.2% of these same companies beat EPS estimates and 73.1% beat revenue estimates.
It's an early stage in the reporting cycle and as more members publish their Q4 results the numbers will continue evolving. However, particularly in comparison to the last few quarters, a good start is clearly being made.
Q4 results are also available for 20.6% of the Finance sector's total market capitalization in the S&P 500 index, with more results coming in the next week. The total earnings of these Finance companies showed a +14.4% increase from the same period last year and - 3.4% lower revenues. 96.2% beat their EPS estimates and 73.1% beat revenue estimates.
All around, banks have shown a notably improved recent performance compared to the first three quarters of the year.
The overall view of Q4 shows that S&P 500 index total earnings are expected to be down 7.8% compared to the same period last year, with a 0.3% increase in revenues.
Transportation, Energy, and Consumer Discretionary sectors remain the weakest sectors. Respectively, they have been hit with earnings declines of -101.1%, -93.1%, and -72.2%. These three sectors are the ones that struggled during the first three quarters of the year.
However, it's good news for the Autos, Construction, and Basic Material sectors, with Q4 earnings predicted to increase respectively by 83.9%, 27.4%, and 9.4%. Finance sector earnings are also expected to be up by 4.5% with -2.4% lower revenues.
Financial charts show that growth is expected to improve significantly from the current 2021 Q1 period, with especially strong growth in Q2, especially compared to the 2020 Q2 predict when profitability slumped as a consequence of Covid-19.
Taking all this information into account, growth is expected to resume this year relative to 2020 estimates, with the full-year 2021 S&P 500 index earnings predicted to rise by 22.8%.
Over the last six months, 2021 estimates have been rising steadily. However, as the macro backdrop becomes clear, especially in the second half of the year, there is still significant room for improvement and positive revisions.