The latest earnings season kicked off last week with big banks getting things started. JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C), Bank of America (NYSE: BAC), and Wells Fargo (NYSE: WFC) all reported results last week and for the most part, the reports were better than expected. JPMorgan, Citi, and Bank of America beat their earnings estimates while the troubled Wells Fargo came up short of estimates.
The earnings reports point to a healthy banking industry and the banks cited U.S. consumers as one of the main reasons for the strong results. Another reason for the positive results has been heavy share buybacks in the industry. The banking industry has been concerned about lower interest rates with the Fed making three cuts to the Fed Funds rate last year.
The rate cuts did seem to have an impact as only Citi saw an increase in its net interest margin. Net interest margin measures the interest collected on loans minus the interest paid on deposits. Historically banks haven’t performed as well during falling interest rate environments.
Something I took note of was how the stocks performed after the earnings reports. With Wells Fargo missing earnings estimates, the stock is down about 5.6% and that isn’t a great surprise. What did surprise me a little is how the other three bank stocks performed compared to the overall market. Since January 13, the day before bank earnings started coming in, the S&P is up 1.22%. JPMorgan is only up 0.73%, Citi is up 0.58%, and Bank of America is down 1.0%.
I have stated before that I don’t really care whether a company beats or misses its earnings estimates. What I’m interested in is how the stock reacts after the report. Seeing the bank stocks underperform the overall market after pretty solid earnings beats by three of the four—this is a concern for me.
What this suggests to me is that the expectations may have been too great heading into the earnings reports. This is why I look so closely at sentiment indicators ahead of earnings reports. If the expectations, not the estimates, are too high, it becomes very difficult for companies to impress investors enough to move higher.
Let’s face it, history shows that the majority of companies beat analysts’ estimates. In fact, the historical average shows that 64.7% of S&P stocks beat their estimates each quarter. What really matters is how investors perceive the earnings reports and whether or not companies impress them enough to compel investors to buy the stock.
The banks weren’t the only ones that didn’t jump after beating earnings. Taiwan Semiconductor (NYSE: TSM) beat estimates, beat revenue forecasts, and raised guidance going forward. Even after posting such impressive results, the stock hasn’t really gone anywhere. The company reported before the market opened on January 16. The stock closed at $58.39 on January 15 and it closed at $58.58 on Friday. Granted the stock has jumped over 60% since mid-June and the rally could just be stalled, but I am concerned that the optimism was just too high.
These are only a few examples, but hopefully this isn’t a trend for the market as a whole. The earnings season is just getting started and we are expected to get results from a number of widely-held and closely watched companies this week. Of the companies set to report this week, we see names like Halliburton, Netflix, Texas Instruments, IBM, and Intel.
It is early in the earnings season, but I think we need to keep an eye on the reactions to earnings over the coming weeks. If investor expectations are too high, we could see stocks fall or consolidate even as the companies beat estimates at a normal rate.