MARKET SNAPSHOT: Banks Kick Off Low-expectation Earnings Season

By Wallace Witkowski, MarketWatch

SAN FRANCISCO (MarketWatch)--Big banks and other financial companies will dominate the start of earnings season this week, as the sector is expected to underperform the broader S&P 500 index in a quarter where expectations have already dropped considerably.

Stocks finished slightly lower the past week with both the Dow Jones Industrial Average (DJI) and the Nasdaq Composite Index (RIXF) down 0.5%, and the S&P 500 index (SPX) off by 0.7% after the December jobs report on Friday showed a decline in wages.

Another quarter of topped lowball outlooks expected

Earnings for the fourth quarter are expected to grow by 1.1%, according to John Butters, senior earnings analyst at FactSet. That's down from the 1.6% growth estimate at the end of the quarter, and well below the expectations of 8.4% growth at the start of the fourth quarter.

Then again, seeing those estimates are traditionally lowballed, earnings growth should work out slightly higher, by about 2.1 percentage points on average, according to Butters. Companies are fairly pessimistic, or lowballing more than usual, as 81% of those providing an earnings outlook for the fourth quarter have given one that has fallen below the Wall Street consensus.

Big banks and financial firms kick off earnings season this week after Alcoa Inc. (AA) reports on Monday. The financial sector is expected to underperform the S&P 500 on earnings and revenue for the fourth-quarter with a 1.7% decline on earnings and a 1.8% increase in revenue, according to FactSet.

As energy profits fall, where does that money go?

While the U.S. economy added 252,000 jobs in December, making 2014 the best hiring year since the 90s, wages dropped for the month, placing wage growth barely ahead of inflation.

It appears that stagnant wage growth is helping keep earnings afloat this season.

"The biggest cost component for S&P 500 companies, wages, has not yet exerted enough upward pressure on corporate cost structures to raise concerns about profit margins, which continued to expand throughout 2014 and currently remain at record highs," Burt White, LPL Financial's chief investment officer, said in a recent note.

White expects the next few weeks to be "a tale of two earnings seasons," where lower energy prices hit energy sector earnings but may benefit other sectors like consumer discretionary, manufacturers, and airlines. One big name in energy reports this week Schlumberger Ltd. (SLB) on Friday.

"This earnings season, earnings 'ex-energy' will likely become a commonly heard phrase because of the sector's expected divergence," White noted. "Analysts and strategists will likely strip out energy and assess how earnings for the S&P 500 would look if that sector is excluded."

Notable earnings reports this week

 
Report Date     Company/Ticker (Estimated FactSet EPS / revenue) 
Mon., Jan. 12   Alcoa (27 cents / $6.04 billion) 
Tues., Jan. 13  CSX Corp.  (49 cents / $3.18 billion) KB Home  (56 cents / $774.7 million) 
Weds., Jan. 14  J.P. Morgan Chase & Co.  ($1.31 / $23.63 billion) Wells Fargo & Co.  ($1.02 / $21.21 billion) 
Thurs., Jan. 15 Intel Corp.  (66 cents / $14.7 billion) Bank of America Corp.  (31 cents / $21.12 billion) BlackRock Inc.  ($4.72 / $2.88 billion)Citigroup Inc.  (11 cents / $18.83 billion) Lennar Corp.  (96 cents / $2.58 billion) 
Fri., Jan. 16   Goldman Sachs Group Inc.  ($4.38 / $7.78 billion)Schlumberger ($1.46 / $12.71 billion) 
 
 

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