12 January 2018 at 11:31 GMT
- Q4 corporate earnings season gets into full swing
- Analysts expect Q4 EBITDA growth at S&P 500 companies to be record high
- We expect very strong results from US financials, helped by increasing interest rates
- Trading and some investment banking seen weak, asset management strong
- Q4 results due Friday from JPMorgan, Wells Fargo and BlackRock
Wells Fargo branch in Portland, Oregon. US financial groups are enjoying a
tailwind from rising interest rates. Photo: Shutterstock
By Peter Garnry
As the fourth-quarter earnings season begins, the investment community finds itself amid one of the strongest starts to a new year in 30 years. The strong performance in global equities is accompanied by expectations for S&P 500 EBITDA growth to exceed all previous realised growth rates since 1991. In other words, expectations are through the roof.
On top of that, most economic surprise indices across major economies are roaring at the highest levels since 2000. It's hard not to jump on the bandwagon. But expectations have a gravitational pull forcing them to mean-revert. Nothing good lasts forever. That's also why we keep saying in our morning call that we expect an equity market correction later in the first quarter. Q4 earnings could in the short term help the equity market push higher, but a new reality looms ahead.
In Q3 of 2017, S&P 500 companies finally reached a new record on EBITDA per share, which is the cleanest measure of operating performance. But keep in mind that since 2007 the general price level has risen 20%, and on top of that the index divisor has shrunk by 4.5% due to buybacks. So if you measure EBITDA in real terms, even S&P 500 companies have not yet fully recovered their pre-financial crisis levels.
We have already seen a few Q4 earnings releases. If the reporting period ends in November, then two out of three months for Q4 are published and these reports are included in the Q4 earnings season. So far numbers have been very strong against expectations. More than nine out of 10 reports have seen both sales and earnings beat analysts' estimates.
The first full Q4 earnings release was delivered by Delta Air Lines yesterday, with sales beating estimates by 1% and EPS by 10%. The shares were up almost 5% in yesterday's session.
The start of the US earnings season is always heavily influenced by financials. Today JPMorgan, Wells Fargo and BlackRock report Q4 earnings. In general, we expect very strong results from US financials as the industry is enjoying a strong tailwind from increasing interest income on excess reserves sitting at the Fed, strong credit growth among households and corporates, and rising interest rates. Trading and some parts of investment banking are expected to be weak in Q4 both quarter-on-quarter and year-on-year. Asset management is expected to do extremely well due to strong cross-asset performance in 2017.
Insurance companies are also expected to perform strongly in Q4 thanks to the tailwind from interest rates. US banks will deliver strong earnings excluding non-cash flow impacts from the US tax reform, so evaluations should be based on adjusted Q4 numbers.
Another big tailwind for US financials is the US Treasury Department's plan to reduce regulation, potentially unleashing $124 billion of capital which could increase lending through easier credit standards (which, by the way, is already trending down).
The following table shows the 30 largest companies reporting earnings next week.
Source: Bloomberg and Saxo Bank