Bank of America (BAC) is scheduled to announce quarterly results on October 17, while Goldman Sachs (GS) is expected to report earnings on October 18. What to watch for:

ANALYSTS DIVERGE ON GOLDMAN SACHS: On October 5, Atlantic Equities analyst John Heagerty downgraded Goldman Sachs to Underweight from Neutral with a price target of $290, down from $330. The analyst cited declining investment banking activity, falling equity markets and concern that trading estimates "remain too optimistic" for the downgrade. In addition, there are few near-term positive catalysts to improve the stock's risk/reward equation, Heagerty told investors in a research note. The analyst noted that banks typically underperform the market by 30% early in a recession before outperforming by a similar amount once the yield curve has steepened to 50 basis points. He sees the current backdrop as similar to a combination of the early 1990s and 2000s recessions, "which would provide an environment in which banks can absorb credit defaults and outperform in a relative sense while highly-priced stocks de-rate.”

Meanwhile, Keefe Bruyette analyst David Konrad upgraded Goldman Sachs to Outperform from Market Perform with a price target of $429, up from $395. The analyst told investors that he believes Goldman has limited AOCI risk and sees the main driver of the stock as likely to be excess capital generated by harvesting on-balance sheet PE assets while growing its alternative asset management business.

ABILITY TO DEFEND ROE ‘IS KEY’: In a third quarter preview research note, Bank of America analyst Ebrahim Poonawala told investors that he believes Goldman Sachs’ ability to defend the ROE in light of continued weakness in investment banking activity is key to supporting is thesis for a secular re-rating in the stock. Investors will be keenly watching for management comments on the consumer strategy given the flurry of news reports in recent months suggesting that a strategic rethink is underway, he wrote. Poonawala sees it as unlikely that management reverses course on this strategy – a hallmark initiative of CEO David Solomon – but some refinement around the pace of investment spend and growth targets could occur. The analyst conservatively forecasts an efficiency ratio of 65% for the second half of 2022 versus 62% reported for the first half of 2022.

TARGET CUTS AHEAD OF RESULTS: On Tuesday, JPMorgan analyst Vivek Juneja lowered the firm's price target on Bank of America to $35.50 from $40.50, while keeping an Overweight rating on the shares. Large bank stocks have continued to lag the S&P 500, creating a "disconnect between near term fundamentals and stock performance because the key driver of strong fundamentals is continued rise in interest rates," Juneja told investors in a research note. However, the sharp rise in rates is raising concerns about a hard economic landing, the analyst said. He added that loan growth has slowed and capital markets-related revenues are likely to remain very weak other than trading. Juneja expects large bank stocks to continue to be pressured "while recession fears are looming," and hence he remains "on the sidelines."

Last week, Morgan Stanley analyst Betsy Graseck lowered the firm's price target on Bank of America to $36 from $40, maintaining an Equal Weight rating on the shares. Graseck lowered price targets across her bank coverage by a median of 3%, noting that liquidity constraints are building and that banks are having to increasingly fund loan growth with higher cost deposits, more debt, and securities portfolio runoffs. Rapidly rising and "higher for longer" rates and higher capital requirements add up to "an accelerating credit cycle," said Graseck, who suggested banks with excess capital, excess liquidity, and positive operating leverage as "where to position long."

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