The second-quarter earnings season is officially underway as investors prepare for a slew of results that could define market direction over the course of the summer. The big banks are up first in typical fashion, with JPMorgan Chase (JPM) and Morgan Stanley (MS) releasing their Q2 results before the bell.
In the background is a bear market that is constantly growling louder and it will likely take some broad-based beats and exceptionally rosy outlooks to get the bull bellowing again.
Financial picture: Keep an eye on investment bank revenues amid sluggish M&A and underwriting, as well as reduced EPS estimates from a decline in capital markets activity. Trading revenue could soften the blow, but could also disappoint given current market conditions. Another area to take note of are updates on the lending front due to the Fed’s increasingly aggressive rate hike cycle. While higher rates are good for net interest income, they’re bad for business lending as the increased cost of capital tamps down demand.
“For now, the largest banks are likely to confirm low credit risk to credit cards, commercial and industrial loans, commercial real estate, and trading/counterparty losses,” wrote CFRA analyst Kenneth Leon. That will change if the U.S. hits a recession later this year or in 2023, with consumers depleting personal savings as rising costs reduce discretionary income.
Outlook: While many analysts have been lowering their Q2 estimates in recent months, earnings among S&P 500 companies are still expected to have risen 4.3% Y/Y (though it would mark the slowest pace of growth since the fourth quarter of 2020). According to FactSet, the S&P 500’s expected net profit margin for Q2 is also expected to come in at 12.4%, which is above the five-year average and slightly higher than the previous quarter. “I’m absolutely gobsmacked that margins are expected to be as high as they are,” declared Hans Olsen, chief investment officer at Fiduciary Trust. “It’s just this notion of hope over reality.”