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Financials to kick off earnings season

January 12, 2021

Graph depicting annualized changes in the S&P 500

Source: Standard & Poor’s

Fourth quarter earnings season gets underway this week, with the banks again in the leadoff position. JPMorgan, Citigroup, and Wells Fargo all report on Friday while Bank of America is on tap for early next week. These have been heady days for the bank stocks, as the S&P subgroup was up by 32.2 percent in Q4, outpacing the broader market by more than 20 full percentage points due to rising long-term interest rates and an improving economic outlook.

Loan loss reserves flattened in aggregate in Q3 after sizeable builds in the first half of 2020 and were likely drawn down last quarter as vaccine breakthroughs lifted growth expectations for the year ahead (recall that JPM already cut its loan loss provision sharply in the third quarter as it turned more bullish on the consumer). In addition, the steepening yield curve probably drove net interest margins higher for the first time in eight quarters. Historically, the banks have outperformed to a significant degree early in expansions when the yield curve is steepening. Moreover, this effect tends to persist, as the correlation between the curve and relative bank stock performance strengthens with a lag of one year.

The caveat is that delinquencies and defaults lag the business cycle, so there is likely still some pain to be taken from the recession last year. That said, these companies are among the best positioned to benefit from the developing economic backdrop and are a good bet to get earnings season off to an encouraging start.


Daily Trivia

Best known for his role in a groundbreaking 1876 event, who was AT&T’s first employee?

Previous Question

What country has promoted itself with the slogan “The 45-Minute Country” in reference to the very short distances between its major tourist attractions?


El Salvador


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