Written by Norman Isaac Mwambazi

What to know in the week ahead as big banks kick off Q4 earnings season, retail sales

It is the new year and although some companies in several sectors have already reported their FY2020 Q4 earnings, big …

It is the new year and although some companies in several sectors have already reported their FY2020 Q4 earnings, big banks are set to do so this week to update investors about how they wrapped up their 2020 that proved to be quite a tumultuous year.

For the benchmark S&P 500 earnings overall, investors hope to see corporate profits fall in Q4, extending 2020’s streak of weak earnings caused by the COVID-19 pandemic that sapped up demand and disrupted business operations.

Banks

In addition to profits, analysts expect an 8.8% year-over-year drop in the total S&P 500 Earnings Per Share (EPS) for the fourth quarter, and according to FactSet, a financial data and software company, this drop would represent the third-largest year-on-year drop in EPS for S&P 500 since Q3 FY2009, more than a decade ago.

However, FactSet analyst John Butters said these estimates have recently been upwardly revised thanks to an improved outlook for profits in financial companies.

“The Financials sector has recorded the largest decrease in its expected earnings decline of all eleven sectors since the start of the quarter (to -7.5% from -24.1%). This sector has also witnessed the second-largest increase in price (+28.5%) of all eleven sectors since September 30.” Butters wrote in a note on Friday last week. 

Towards the end of 2020, companies – including some of the biggest U.S. banks got a boost in their shares after the discovery of the COVID-19 vaccine and the hope of having the economy fully reopen in 2021. The Federal Reserve’s decision to keep benchmark interest rates near 0% last year dragged on banks’ net interest income or profits made from their core lending businesses.

Earlier in 2020, the Federal Reserve Bank stopped capped big banks from increasing their dividends or buying back their shares so they could have enough capital in case the economy slid into recess, but in December 2020, it decided to allow them to resume buying back shares and paying dividends. This was on condition that these totalled less than the average of their net income over the previous year. This decision was beneficial to the banks.

Banks had also begun releasing some of their massive credit-loss reserves last quarter, which had swollen to comprise tens of billions of dollars at the height of the pandemic in anticipation that more loans would sour in a worsening economy. These substantial provisions for credit losses had also anchored bank profitability earlier in 2020.

Matt O-Connor, an analyst at Deutsche Bank Research said in a note:

“There should still be another 10 – 15% relative move higher in bank stocks and potentially more if the economic recovery lasts several years (before the next downturn). That said, further meaningful gains in bank stocks vs. the broader market may be back-ended in 2021 given how far we’ve come in just four months.”

And while banks’ lending businesses likely crushed in the Q4, trading revenue likely extended a run of strength, as a still-surging stock market helped boost activity across these businesses.

For instance, JPMorgan’s fixed income market and equity markets revenue had jumped 29% and 32%, respectively, in Q3, while Citi’s revenue in these categories grew by a respective 18% and 15% in Q3 as well.

Here is this week’s schedule for earnings reports from big banks

Monday

  • Carnival Corporation (CCL) before market open

Tuesday

  • Albertson’s (ACI) before market open

Thursday

  • BlackRock (BLK),
  • First Republic Bank (FRC),
  • Delta Air Lines (DAL) before market open

Friday

  • PNC Financial Services Group (PNC);
  • JPMorgan Chase (JPM),
  • Citigroup (C),
  • Wells Fargo (WFC) before market open

Retail sales

On Friday, the U.S. Department of Commerce’s monthly retail sales report is expected to reflect more moderation in consumer spending at the end of 2020. Consensus economists expect that retail sales were flat in December over November, after a 1.1% drop during the previous month.

“While spending likely increased steadily on a non-seasonally adjusted basis, the ramp-up in seasonal spending was likely lower than in previous years as the pandemic steadily worsened through the month and fewer family gatherings took place over the holidays,” Nomura Chief Economist Lewis Alexander said in a note Friday.

“Restrictions on restaurant activity resulted in sharp declines for OpenTable data, suggesting a decline in foodservice spending during the month. However, this will likely be offset to some extent by large increases in gasoline store sales, considering higher retail gasoline prices during the month.”

The November retail sales print represented the biggest drop since April’s record plunge, as virus-related restrictions constrained spending on services and more than offset ongoing strength in goods spending.

A nearly 8% plunge in department store sales and sharp declines in a clothing store and restaurant spending contributed most heavily to the overall monthly drop in November. However, even with the month-over-month decline, retail sales remained higher by more than 4% year-over-year, thanks to a surge in spending on goods earlier on during the pandemic period.

“Total sales are set to close out the year better than they started it, with our forecast for flat sales growth in December consistent with a 4% year-over-year gain. This remarkable feat cannot be said for many areas of the economy that continue to reel from the pandemic,”

Wells Fargo economist Jay Bryson said in a note Friday. “But, retail has disproportionately benefited from a surge in goods spending. That said, there remains wide variation in sales by the retailer, and we expect that these dynamics of varying sales continued last month amid rising virus case counts.”

A weaker-than-expected print in Friday’s retail sales report could also signal some additional, pent-up consumer demand could come back for goods consumption in the coming months, Bryson added.

Bryson added, “If sales exceed our expectations, however, it would be further support of our forecast that after a year defined by the virus, households spent in record numbers this holiday season as they yearned for comfort and normalcy.”