Earnings season lurched to a slow start last week, with only eight S&P 500 companies reporting. Banks closed the week with messy earnings, and investors were generally unimpressed. The KBW Bank stock index was 3.1% lower for the week. Despite slightly hotter-than-expected consumer inflation (CPI), stocks were higher, and yields declined. The S&P 500 rose 1.9% for the week, and the 10-year Treasury yield fell from 4.1% to 3.9%. The Magnificent 7 led the charge higher with a gain of 4.3%, while the equal-weighted S&P 500 squeaked out a meager 0.3% rally. Recall the Magnificent 7 consists of Microsoft (MSFT), Meta Platforms (META), Amazon.com (AMZN), Apple (AAPL), NVIDIA (NVDA), Alphabet (GOOGL), and Tesla (TSLA). The fourth-quarter earnings season continues its slow start this week, with 23 S&P 500 companies scheduled to report. A more detailed preview of the earnings season is available here.
At this early point in the reporting season, blended earnings, which combine actual with estimates of companies yet to report, are worse than forecasts at the end of the quarter. There was little movement from other sectors, but bank earnings within the financial sector made the overall S&P 500 reading drop.
Bank and financial earnings dominated the end of the first week of the earnings season. Headline earnings from the big banks were messy and significantly worse than expected. Bank of America (BAC), JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) missed earnings estimates by various measures. The FDIC special assessment to fund the losses from the 2023 banking crisis and other charges complicated large bank earnings. Investors bullish on bank stocks anticipate better times when the Federal Reserve begins to lower short-term interest rates rather than expecting robust earnings this quarter. Outside the banks, asset manager BlackRock (BLK) posted better-than-expected results for the financial sector.
The range of companies reporting earnings broadens slightly but is still dominated by financials. Banks and financials scheduled this week include Goldman Sachs (GS), PNC Financial (PNC), Schwab (SCHW), US Bancorp (USB), Discover Financial Services (DFS), Fifth Third Bancorp (FITB), Comerica (CMA), and several other regional banks.
Sales growth is closely tied to nominal GDP growth, combining after-inflation economic growth (real GDP) with inflation. With nominal GDP growth likely solid year-over-year for the fourth quarter, topline revenue growth for companies should have some tailwind. So far, with a few companies reporting, sales growth has moved fractionally lower than expectations going into the earnings season.
So far, the blended earnings performance has underperformed expectations at the end of the quarter. Combining actual results with consensus estimates for companies yet to report, the blended earnings growth rate for the quarter is at -0.1% year-over-year, ahead of the expectation of +1.6% at the end of the quarter.
Outside of earnings season, consumer inflation data was less friendly than hoped. The December headline CPI reading rose to 3.4% year-over-year rate, up from 3.1% in November and above the 3.2% consensus estimate. Looking at the Supercore CPI reading, which held steady at 3.9% year-over-year, paints a less dire picture. The Supercore strips out housing inflation, which the government data is overstating now, and focuses on services inflation, which should be the epicenter of any inflation coming from the solid labor market and wages. Retail sales on Wednesday will provide a crucial look at the strength of the U.S. consumer in December.
While the worse-than-expected large bank earnings made for ugly earnings headlines, the earnings season should improve after this week. This week remains heavy on earnings-challenged banks, with some smaller regional banks likely to see fewer charges from the FDIC assessment but more write-offs from commercial real estate. Investors should still expect positive year-over-year earnings growth for the quarter once the banks are in the rearview mirror.