US banks face major hurdles in second-quarter earnings

Difficult Q2 earnings lie ahead

It will be a tough second-quarter (Q2) earnings season for most of corporate America, but for the nation’s big banks it may well be even tougher. The sector faces the prospect of thinner margins and an increase in bad loan provisions, with key institutional clients weathering a volatile market and major corporate borrowers bolstering their cash reserves.

Revenue is expected to fall overall for the sector, but costs will rise as the firms spend their cash on providing safe working environments in offices as well as equipment for home working, along with a general drop in demand for activities such as mergers and acquisitions (M&A) and initial public offerings (IPOs). This will put direct pressure on margins, hitting profitability and reducing the attractiveness of the major banks overall.

Provisions for bad loans will have to increase, as companies default on their borrowing or defer payments, putting yet more stress on profitability levels. Banks, of course, are essentially a play on the overall health of an economy, and as the US economy looks set for a long period of negative growth at worst and weak growth at best, the sector will struggle to hold its attractiveness for investors.

Bright spots won’t offset overarching problems

The two bright spots will be increased trading activity, as major institutional clients such as hedge funds and fund managers take advantage of the coronavirus-fuelled volatility seen since February, and also a rise in fees from fundraising activities by big companies looking to boost their cash reserves. But these will not offset the problems entirely, providing only some relief for the sector, especially in the case of lending, since the huge cuts in interest rates by the Federal Reserve (Fed) will have reduced the income on these loans for the lenders.

However, there is the hope that the banks will have seen some improvement in the latter part of Q2 and the early part of the new quarter. Like most earnings, this time around the real focus will be on the outlook for Q3 and Q4, not on what has already happened. If banks can provide enough of a positive view then their stock prices may do better, even after a substantial rally from the March lows.

JPMorgan share price: technical analysis

JPMorgan's stock continues to see an uptrend from the March lows, although not a particularly impressive one. If the price can avoid a close below $90.00 then it will hold rising trendline support, and the creation of a higher low around this level would help reinforce a guardedly bullish view.

Goldman Sachs share price: technical analysis

For Goldman Sachs, while the price dropped below one line of trend support from the March lows, it succeeded in holding the 100-day simple moving average (SMA) at $186.00, rallying from this level. Further gains target $220.00, while a drop below $185.00 would bring the April and May support zone around $170.00 into view.

Citigroup share price: technical analysis

It is a similar story for Citigroup, which has seen a gain of almost 60% from the March lows. Having held trendline support from this low, the bullish view may be reinforced with bullish crossovers in momentum indicators like stochastics and moving average convergence/divergence (MACD), targeting the recent June high at $62.00 in the first instance.

Wells Fargo share price: technical analysis

Unlike the others, Wells Fargo’s stock cannot be said to be in an uptrend, and indeed it looks set to head back towards the May low at $22.00. The move below $25.40 is a bearish development, and for the time being there is little indication of a recovery that will put the stock back on course to test the early-June highs.