Corporate Earnings – Financial Sector
Financial regulatory reform and continued consumer deleveraging are limiting the financial sector’s earnings growth potential. In fact, over the past few months, multiple analysts have cited those as reasons for an impending second recession. I disagree with that premise, however. While owning the equity of financial institutions might not have been a favorable investment heading into October, the improvement in financial institutions’ balance sheets suggests that owning their debt is the favored investment strategy.
With October earnings season underway, financial institutions’ current earnings are the best indicator that the “coming recession” analysis is incorrect. What has been reported so far is not consistent with the financial earnings reported in the summer of 2008 that telegraphed the Great Recession of that year.
Let’s take a look at the facts . . .
- 19 of 81 S&P 500® financial companies have reported this quarter
- Average EPS growth is +8.26% vs. July 2008 -52.35%
- Average sales growth is -.09% vs. July 2008 -6.70%
- Commercial Banks
- Average EPS growth is +14.93% vs. July 2008 -47.91%
- Average sales growth is -1.66% vs. July 2008 +9.99%
- Wells Fargo contributed -3.55% sales growth to the average decline of -1.66%
- Diversified Banks / Capital Markets*
- Average EPS growth is +10.39%, vs. July 2008 -64.75%
- Bank of America (BAC) – Average EPS growth is +0% vs. July 2008 -42.31%
- Citigroup (C) – Average EPS growth is +75.71% vs. July 2008 -50%
- JP Morgan (JPM) – Average EPS growth is + .99% vs. July 2008 -55%
- Capital Markets [Morgan Stanley (MS) & Goldman Sachs (GS)] – EPS growth is -8.34% vs. July 2008 -55%
- Average sales growth is + .29% vs. July 2008 -5.92%
- BAC Average sales growth is +6.37% vs. July 2008 +3.84%
- C Average sales growth is +. 45% vs. July 2008 -29.96%
- JPM Average sales growth is - .26% vs. July 2008 +6.68%
- Capital Markets (MS & GS) sales growth is -5.77% vs. July 2008 +16.03%
*Keep in mind: During the July 2008 quarter, MS and GS earnings were bolstered by strong trading revenue in particular, as oil prices averaged $123.80 for the quarter. Their ability to assume market risk on their proprietary trading desks was far greater than the current Dodd-Frank environment permits.