US earnings season: banks beat but earnings expectations low

First-quarter earnings have kicked off on Wall Street, with the banks kicking off the reporting period with a bang.

In this week’s Investor Spotlight, we look at early banking results, what investors are expecting from S&P 500 earnings for the quarter, and three stocks to watch in the week ahead.

Banks buck crisis fears

The banks kicked off the earnings season on Friday with investors homing in on the sector amidst continued anxiety about US financial stability.

After the banking crisis that engulfed the US last quarter, which saw several financial institutions collapse, market participants have been steeling for greater downside risks to bank profits.

Despite the ongoing risks of a softening in earnings due to weaker credit conditions, Wells Fargo, JP Morgan, and Citigroup all smashed expectations for the quarter. Rising interest rates continued to buoy the earnings of the major banks, which have proven insulated from problems that plagued regional counterparts.

Net interest margin expansion was also supported by a steady inflow of deposits, as customers looked to move their money from smaller to larger and safer institutions.

Signs of caution from the banks

All three institutions increased provisions for bad loans considerably in anticipation of weaker economic fundamentals. On the outlook, JP Morgan CEO Jaimie Dimon said higher interest rates “will undress problems in the economy” and warned that interest rates could stay “higher for longer”.

S&P 500 remains poised for an earnings recession

Expectations are low for this US reporting period, with the S&P 500 on the cusp of entering a technical earnings recession.

According to FactSet data, the index will deliver a 6.5% drop in profits for the quarter, following a 4.6% drop in the previous quarter.

The cyclical materials sector is tipped to deliver the greatest decline in profits of nearly 36%, while the heavy-weight information technology sector is forecast to show a 15% contraction. Conversely, resilience in US consumers is expected to underpin a market-beating 35% expansion in profits for the quarter.

What to watch this week

US financial firms highlight the earnings calendar in the week ahead, with approximately $3.5 Trillion of the S&P 500’s total market reporting.

Three stocks to watch

• Tesla

Tesla’s shares have been pummelled in the past 18 months, owing to a series of macroeconomic and company-specific factors.

Rising interests have hurt the company’s valuation, both because of the multiple compression caused by higher risk-free rates and the subsequent softening in economic activity. The company has struggled to adjust swiftly to a rising cost environment, while the personal and financial behaviour of CEO Elon Musk has weighed on investor sentiment.

Recent delivery figures were also underwhelming while uncertainty persists about whether recent price cuts will boost sales, or simply erode margins further.

Analysts are forecasting a 20% decline in earnings in the first quarter, marking the first drop in profit growth since the company first hit profitability four years ago. This fall in earnings is in part due to a very strong quarter in the corresponding period last year, with EPS still expected to be a relatively robust $0.86 per share.

Nevertheless, lower sales for the quarter and lower margins is the major driver of the result.

After losing more than half its value from its 2021 peak, analysts are seeing value in Tesla’s stock. Although it has trended lower over several quarters, it remains trading at a discount to the consensus price target of $198.73. The stock also maintains a consensus “buy” rating amongst the broker community.

Tesla stock is in a structural downtrend. However, short-term momentum is shifting higher and the price has pushed above the 200-week moving average, which makes up a confluence of support levels around $US175.

Technical resistance remains around $207.50 with further upside for the stock opening up if it breaks.

Tesla weekly chart

• Netflix

Netflix will be a barometer for US consumer activity this earnings season.

As the cost of living pressures bite and amid weaker consumer confidence, Netflix faces a more difficult environment to grow its top line. The company’s management has taken steps to tackle this risk and arrest slower subscriber growth by diversifying its revenue streams.

As IG Australia Market Analyst Tony Sycamore outlined, the company will no longer report subscriber growth and instead focus on revenue growth. The company is forecast to deliver 3.9% topline growth, which is higher than the previous quarter, but extends a trend lower over several quarters. EPS is also forecast to drop 20% to $2.86 per share.

The broker community maintains a positive bias toward Netflix shares. Although, with 20 analysts recommending a hold, three a sell, and twenty a buy, sentiment is relatively mixed, with the stock trading at a slight discount to its $357 consensus estimate.

Netflix has broken the bottom of its upward trend channel after rejecting resistance at $350 and as momentum turns to the downside. The 100-week moving average may see buying support emerge, while technical support looks to be around $290.

Netflix weekly chart

• Bank of America

After the surprise earnings beats of other US banks last week, hopes have risen thank Bank of America's results will exceed expectations.

Analysts are forecasting flat earnings growth from the corresponding earnings period last year of 81 cents per share, supported by a significant jump in net interest margins.

Even with fears of the banking crisis and the hit to credit creation subsiding, investors remain keen to follow the guidance from Bank of America’s board about the growth outlook for the bank and the US economy, amid expectations of a significant slowdown in economic activity.

The analyst community is upbeat when it comes to the investment case for Bank of America stock. Modest earnings growth is expected in the quarters ahead, while the stock trades at a meaningful discount to the $36.17 price target, and continues to boast a consensus buy rating amongst brokers.

Bank of America shares remain in a downtrend, but as sentiment towards banks turns, could see a short-term rebound. Price is currently challenging technical resistance at $29.50 per share, which if broken may open a push toward the 200-day moving average. Meanwhile, support may be found at $27.00.

Bank of America weekly chart