EC Positive Start To Q4 Earnings Season

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We are off to a great start in the Q4 earnings season, with the big banks coming out with a notably improved profitability picture relative to what they were able to show in preceding periods. This reconfirms our view of a steadily improving earnings outlook that we have been highlighting over the last few months.

The positive bank results aren’t just reflective of business conditions in the last quarter of 2020, but rather a function of growing optimism about the coming quarters, notwithstanding the elevated infection rates and hiccups on the vaccination front. The three major banks – JPMorgan (JPM - Free Report)Wells Fargo (WFC - Free Report), and Citigroup (C - Free Report– released more than $5 billion combined in loan loss reserves they had set aside in the first three quarters of the year to cover loans going bad as a result of the pandemic.

In effect, these banks are saying — through these reserve releases — that they expect economic conditions in the coming quarters to be stronger relative to what they had originally modeled. This has a favorable read-through for all sectors, particularly the economically sensitive ones.

The market’s lukewarm reaction to these bank results is solely a function of how strong these stocks have been over the last couple of months.

Bank stocks have lagged the broader market over the past year, but they have been clearly in the lead over the past three months. JPMorgan and Citigroup shares are up +0.8% and down -20.1% over the past year, respectively, when the S&P 500 was up +16.2%. But over the last three months, JPMorgan shares have gained +36.4% and Citigroup is up an impressive +49.6%, handily outperforming the S&P 500 index’s +9.5% gain. The earnings releases appear to have served as a convenient excuse to cash in some of those gains.

The Q4 reporting cycle accelerates meaningfully this week, with more than 90 companies on deck to report results, including 40 S&P 500 members. This week’s reporting docket is dominated by banks and brokers, but we do have a number of bellwethers like Netflix (NFLX - Free Report)Procter & Gamble (PG - Free Report)IBM (IBM - Free Report)CSX Corp. (CSX - Free Reportand others.

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John Lagarde 1 month ago Member's comment

What about $CATV?