The large money-center banks that will kick off the 2020 Q2 earnings season for the sector this week have been hit hard in the ongoing pandemic-driven economic downturn.

Stocks in the Zacks Major Banks industry — including JPMorgan (JPM), Wells Fargo (WFC), Citigroup (C) and others — on deck to report results this week have only modestly recovered from their March 23 lows, and lag the broader market in a major way. Even within this beleaguered space, Wells Fargo is in a league of its own, with the stock losing further ground for company-specific reasons.

The chart below shows the year-to-date performance of the S&P 500 index, the Zacks Major Banks industry, JPMorgan and Wells Fargo. As you can see, JPMorgan (blue line) has done only modestly better than the industry (red line), but they lag the broader market (orange line) in a big way.

This underperformance is not surprising, given the group’s exposure to what is expected to be a sharp downturn in economic activities in the current period. Banking is after all a cyclical business, with the demand for credit and investment banking services strongly correlated with GDP growth. Low interest rates, which the Fed has reiterated will remain in place for an extended period, weigh on margins and net interest income.

The group also suffers in a downturn from deterioration in credit conditions that has a direct bearing on the quality of its assets (loan portfolios) as borrowers struggle to service their obligations.

Offsetting these headwinds are the beneficial effects of PPP loans that have likely expanded balance sheets, although lower margins on these loans will offer limited bottom-line support. Net interest margins across the space will be below the preceding quarter’s level.

We are unlikely to get the full picture on asset-quality measures like allowance for credit losses (money set aside for problem loans) given deferrals/forbearance. But we expect banks to announce bigger provisions than they did in Q1. Banks retain a fair amount of discretion in this area, but the recent Fed decision to use trailing four quarter earnings as the basis for bank dividends will likely serve as a restraint.

Beyond traditional banking, the outlook for capital markets and investment banking remains favorable, with Q2 trading volumes notably above the year-earlier levels. On the advisory side, while M&A volumes were soft in Q2, there was plenty of activity on the equity and debt issuance side.

With respect to banks’ Q2 earnings, and also with companies in other industries/sectors, the important elements wouldn’t be so much the numbers for the June quarter, but rather the evolving outlook for the current (Q320) and following quarter. To that end, it is hard to envision any management team having the visibility to offer useful guidance given the ongoing upsurge in coronavirus infection rates in large segments of the country.

The set-up for bank earnings is tough, with margins under renewed pressure because of Fed policy. We will see the full extent of the Fed’s emergency rate cut in Q2 numbers, with many analysts modeling net-interest margins that are 20 to 25 basis points below 2020 Q1 levels. Loan portfolios likely expanded in Q2, thanks to the PPP business.

All in all, the group is in excellent financial shape in terms of capital cushions. But questions about the group’s dividends remain.

Q2 Earnings Numbers Will Look Ugly

Total Q2 earnings for the Zacks Major Banks industry, including JPMorgan, Bank of America, Wells Fargo and other major industry players are expected to be down -65.1% from the same period last year on -2.1% lower revenues.

Earnings are expected to be down in double-digits at JPMorgan (-51.9% on +2.3% higher revenues), Citigroup (-77.6% & +0.5%) and Bank of America (-66.9% & -5.8%).

The group’s profitability picture is not expected to improve in the current and coming quarters either, as the quarterly earnings and revenue growth picture below shows:

For the Finance sector as a whole (Major Banks industry brings in roughly 45% of the sector’s total earnings), total Q2 earnings are expected to be down -41.8% on -1.8% lower revenues.

The Overall Earnings Picture

The current state of consensus earnings expectations is captured in the following five charts.

The first chart shows how S&P 500 earnings estimates for full-year 2020 have evolved since early January. As you can see, the expectation was for a roughly +8% growth at the start of the year, which has now become a decline of -24.4% decline, unchanged from last week:

The second chart shows how S&P 500 estimates have evolved for the current period (2020 Q2), which is expected to be the downturn’s bottom.

Total Q2 earnings (or aggregate net income) for the index are expected to be down -44.8% from the same period last year on -10.7% lower revenues:

The third chart takes a big-picture view of S&P 500 quarterly expectations, with earnings and revenue growth expectations for the next four quarters contrasted with actuals for the preceding four periods; expectations for 2020 Q2 have been highlighted:

The fourth chart provides a big-picture view on an annual basis:

As you can see above, growth is expected to resume next year, with full-year 2021 earnings for the S&P 500 index currently expected to be up +27.4% relative to 2020 estimates. But as strong as next year’s growth estimate is, total 2021 index earnings would still have yet to return to pre-Covid levels.

In other words, S&P 500 earnings in 20201 are currently expected to be modestly below the 2019 level, as the fifth chart below shows:

These numbers translate to an index ‘EPS’ of $154.73 in 2021 vs. $121.50 in 2020 and $160.65 in 2019.

Q2 Earnings Season Gets Underway

The Q2 reporting cycle will (unofficially) get underway this week. But from our perspective, the Q2 earnings season has gotten underway already, with results from 19 S&P 500 out at this stage. These 19 index members — including FedEx (FDX), Nike (NKE), Oracle (ORCL), Adobe (ADBE) and others — reported results for their fiscal quarters ending in May, which we count as part of official June-quarter tally.

We have 34 S&P 500 members reporting results this week, including the major banks and a number of major operators from other industries like IBM (IBM), Netflix (NFLX), Johnson & Johnson (JNJ) and others. The reporting cycle really ramps up over the next three weeks, as the chart below shows:

For the 19 index members that have reported already, total Q2 earnings or aggregate net income is down -42.9% on -4.8% lower revenues, with 68.4% beating EPS estimates and only 52.6% beating revenue estimates.

This is too small a sample to draw any firm conclusions from. That said, the comparison charts below put these results in a historical context:

The summary table below shows Q2 expectations in the context of what we saw in the preceding period:

As you can see above, all sectors are expected to have lower earnings relative to the year-earlier period, with 4 of the 16 sectors expected to lose money in Q2 (decline rates in excess of -100%). These four sectors are unsurprisingly Energy (Q2 earnings expected to decline -142.4%), Transportation (-151.8%), Autos (-232%) and Consumer Discretionary (-115.7%).

For an in-depth look at the overall earnings picture and expectations for the coming quarters, please check out our weekly Earnings Trends report: What Will Q2 Earnings Season Show?