The first major batch of quarterly earnings reports are due for release this week, beginning with the usual early wave of results from big banks.
For S&P 500 earnings overall, investors are still bracing to see corporate profits fall in the fourth quarter over the prior year, extending 2020’s streak of weak earnings as the coronavirus pandemic sapped up demand and disrupted operations across numerous industries. Consensus analysts expect to see aggregate S&P 500 earnings per share decline 8.8% year-over-year in the fourth quarter, which would represent the third-largest year-on-year drop in earnings for the index since the third quarter of 2009, according to FactSet.
Estimates for the magnitude of the year-end decline, however, have recently been upwardly revised. And an improving outlook for profits in financial companies contributed the most to the improvements, FactSet analyst John Butters said.
“The Financials sector has recorded the largest decrease in its expected earnings decline of all eleven sectors since the start of the quarter (to -7.5% from -24.1%),” Butters wrote in a note Friday. “This sector has also witnessed the second-largest increase in price (+28.5%) of all eleven sectors since September 30.”
The banks reporting earnings results this week – including JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC) on Friday – will be judged against these heightened expectations.
Shares of some of the biggest U.S. banks got a boost in the final leg of 2020 as optimism over a vaccine and economic reopening eased fears of widespread customer defaults and offered prospects of firming rates. Last year’s low-rate environment — with the Federal Reserve still maintaining benchmark interest rates near 0% — had dragged on banks’ net interest income, or profits made from their core lending businesses.
These companies also benefited from the Fed’s decision in December to allow them to resume buying back shares and paying dividends, so long as these totaled less than the average of their net income over the previous year. Earlier in 2020, the Fed had capped big banks from increasing their dividends or conducting any buybacks through year-end to ensure that they would have enough capital shored up to buffer against a possible swift downturn in the economy.
Banks had also begun releasing some of their massive credit-loss reserves last quarter, which had swollen to comprise tens of billions of dollars at the height of the pandemic in anticipation that more loans would sour in a worsening economy. These substantial provisions for credit losses had also anchored bank profitability earlier in 2020.
Against the improving earnings backdrop for banks, strategists increased their outlook on financials for 2021 after the sector ended 2020 as the third-worst performing after real estate and energy.
“There should still be another 10-15% relative move higher in bank stocks and potentially more if the economic recovery lasts several years (before the next downturn),” Deutsche Bank Research analyst Matt O-Connor said in a note Thursday. “That said, further meaningful gains in bank stocks vs. the broader market may be back-ended in 2021 given how far we’ve come in just four months.”
And while banks’ lending businesses likely firmed in the fourth quarter, trading revenue likely extended a run of strength, as a still-surging stock market helped boost activity across these businesses. JPMorgan’s fixed income market and equity markets revenue had jumped 29% and 32%, respectively, in the third quarter, while Citi’s revenue in these categories grew by a respective 18% and 15%.
Retail sales
On Friday, the U.S. Department of Commerce’s monthly retail sales report is expected to reflect more moderation in consumer spending at the end of 2020.
Consensus economists expect that retail sales were flat in December over November, after a 1.1% drop during the previous month.
“While spending likely increased steadily on a non-seasonally adjusted basis, the ramp-up in seasonal spending was likely lower than in previous years as the pandemic steadily worsened through the month and fewer family gatherings took place over the holidays,” Nomura Chief Economist Lewis Alexander said in a note Friday. “Restrictions on restaurant activity resulted in sharp declines for OpenTable data, suggesting a decline in food service spending during the month. However, this will likely be offset to some extent by large increases in gasoline store sales, considering higher retail gasoline prices during the month.”
The November retail sales print represented the biggest drop since April’s record plunge, as virus-related restrictions constrained spending on services and more than offset ongoing strength in goods spending. A nearly 8% plunge in department store sales and sharp declines in clothing store and restaurant spending contributed most heavily to the overall monthly drop in November. But even with the month-over-month decline, retail sales remained higher by more than 4% year-over-year, thanks to a surge in spending on goods earlier on during the pandemic period.
“Total sales are set to close out the year better than they started it, with our forecast for flat sales growth in December consistent with a 4% year-over-year gain. This remarkable feat cannot be said for many areas of the economy that continue to reel from the pandemic,” Wells Fargo economist Jay Bryson said in a note Friday. “But, retail has disproportionately benefited from a surge in goods spending. That said, there remains wide variation in sales by retailer, and we expect that these dynamics of varying sales continued last month amid rising virus case counts.”
A weaker-than-expected print in Friday’s retail sales report could also signal some additional, pent-up consumer demand could come back for goods consumption in the coming months, Bryson added.
“If sales exceed our expectations, however, it would be further support of our forecast that after a year defined by the virus, households spent in record numbers this holiday season as they yearned for comfort and normalcy,” he added.
Economic Calendar
Monday: N/A
Tuesday: NFIB Small Business Optimism, December (100.5 expected, 101.4 in November); JOLTS Job Openings, November (6.652 million in October)
Wednesday: MBA Mortgage Applications, week ended January 8 (1.7% during prior week); Consumer Price Index, month-over-month, December (0.4% expected, 0.2% in November); Consumer Price Index excluding food and energy, month-over-month, December (0.2% expected, 0.2% in November); Consumer Price Index year-over-year, December (1.3% expected, 1.2% in November); Consumer Price Index excluding food and energy, year-over-year, December (1.7% expected, 1.6% in November); Monthly Budget Statement, December (-$143.3 billion in November)
Thursday: Initial jobless claims, week ended January 9 (785,000 expected, 787,000 during prior week); Continuing claims, week ended January 2 (5.072 million during prior week); Import price index, month-over-month, December (0.6% expected, 0.1% in November); Import price index, year-over-year, December (-0.8% expected, -1.0% in November); Export price index, month-over-month, December (0.7% expected, 0.6% in November); Export price index, year-over-year, December (-1.1% in November)
Friday: Producer Price Index for final demand, month-over-month, December (0.4% expected, 0.1% in November); Producer Price Index excluding food and energy, month-over-month December (0.1% expected, 0.1% in November); Producer Price Index for final demand year-over-year, December (0.7% expected, 0.9% in November); Producer Price Index excluding food and energy year-over-year, December (1.3% expected, 1.4% in November); Empire Manufacturing, January (6.0 expected, 4.9 in December); Retail Sales advance, month-over-month, December (0.0% expected, -1.1% in November); Retail Sales excluding autos and gas, month-over-month, December (-0.6% expected, -0.8% in November); Capacity Utilization, December (73.5% expected, 73.3% in November); Industrial Production, month-over-month, December (0.5% expected, 0.4% in November); Business Inventories, November (0.5% expected, 0.7% in October); University of Michigan sentiment, January preliminary (80.0 expected, 80.7 in December)
Earnings Calendar
Monday: Carnival Corporation (CCL) before market open
Tuesday: Albertson’s (ACI) before market open
Wednesday: N/A
Thursday: BlackRock (BLK), First Republic Bank (FRC), Delta Air Lines (DAL) before market open
Friday: PNC Financial Services Group (PNC); JPMorgan Chase (JPM), Citigroup (C), Wells Fargo (WFC) before market open
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Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
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