Earnings season starts with the banks. Today’s reports have convinced me that even if a recession is on the horizon, the financial sector will dodge the economic bullet . . . and the stocks go up from here.
Granted, we’ve only heard from a handful of the biggest institutions, but they account for 27% of the sector by market capitalization. Unless there’s a serious problem lower in the food chain, these numbers will probably set the tone for the rest of the season.
And they aren’t so bad. Yes, we’re still looking for roughly a 9% year-over-year decline for the financials on the earnings side this quarter. But yesterday, that deterioration looked like it would come in about 1 percentage point worse.
In other words, the big banks took our worst likely scenario and did about 10% better than we thought we’d see. “As bad as it gets” wasn’t as bad as we were steeled to expect.
Furthermore, the numbers are trending much better from here. “As bad as it got” last quarter is probably as bad as it will get in the current economic cycle.
After all, the big lenders have now shifted what would have been profit into their reserves against borrower defaults. Granted, we’re looking at $6 billion so far in projected loan losses, but when you’re as big as Bank of America (BAC), for example, the writedowns don’t even account for 2% of your credit card book.
Under normal conditions, that’s a reasonable amount of distress . . . practically the cost of doing business in the consumer market. And now that that cash has been moved into reserve, the banks are free to chase actual profit.
Margins are already healthy. The Fed has actually been a friend to the banks so far. The current quarter is the test. Barring disaster, it’s clear sailing from here.
Sure, there are always winners and losers. Citi (C) isn’t doing great. Bank of New York Mellon (BNY) stumbled a little more than expected.
But JPMorgan (JPM), Wells Fargo (WFC) and Bank of America (BAC) are right on track. They’ve got this under control. And while the rank-and-file bankers haven’t coped with conditions like this, their bosses survived the 2008 crash.
They know how to survive. And they’ll keep doing it.
Buy the financials. This is 14% of the market. If they set the tone for the coming year, earnings growth should accelerate for the market as a whole from here. That’s bullish.