Earnings season begins Oct. 15, with banks – J.P. Morgan Chase, Citigroup and Wells Fargo scheduled to announce their third-quarter results, with Bank of America following up the next day. Banks’ earnings are expected to be ok despite low interest rates. But, the Federal Reserve’s policy change could mean difficult times ahead for most banks. Which means the commentary on the earnings call and guidance for Q4 could be soft.
The Federal Open Market Committee is expected to make two more cuts to the federal funds rate meant to help reduce the chance of the U.S. economy from slipping into recession, but that does not bode well for most banks. It means shorter-term loans that are indexed to short-term rates will reprice at lower rates, reducing lenders’ net interest income. The question is how will the banks make up for the lost revenue with lower funding costs. The bond market anticipating the central-bank stimulus has pushed long-term interest rates down already.
All eyes will be on financial firms which report next week as well. Last week, following Interactive Brokers Group’s decision to cut down its trade commissions to $0, Charles Schwab, TD Ameritrade Holding and Fidelity were forced to reduce their trade commissions to zero. The impact of trading commissions evaporating will be keenly watched.
Future Wealth View
Bank earnings and Technology companies’ earnings are the bell weathers for the market overall. Poor results from banks could take a leg down in the market and, if followed by weak results from technology companies, the market could take a 2-5% correction by end October. The market appears to be primed for a correction following the recent flow of soft U.S. economic data. While it is way too early to start drawing conclusions, a weak start, with companies struggling to beat expectations could set the tone for a bearish earnings calendar.
Moderating U.S. economic growth and notable slowdowns in other major global economic regions coupled with uncertainty about the global trade regime and growing resort to tariffs could likely be the main contributors to the earnings downside and while the overall tone and substance of management guidance during the last earnings season was on the negative side, look for further negativity this time around.
As the saying goes “You’ve got to be very careful if you don’t know where you are going, because you might not get there.”