Citigroup - Wells Fargo - JP Morgan All Beat Earnings Estimates

Citigroup - Wells Fargo - JP Morgan - Stocks Fall Slightly As Trump Gives Update On Trade Talks

Citigroup - Wells Fargo - JP Morgan - All beat estimates. The stock market fell on Tuesday even though the retail sales report was great. It may have fallen because stocks are very overbought.

Or because President Trump stated, America and China have a “long way to go” on making a trade deal. Adding that America can tax an additional $325 billion worth of Chinese goods “if we want.”

This shouldn't surprise anyone because the 2 countries have always had a long way to go to make a deal. Unless the deal ends up being small, there are a lot of components to discuss.

It should take months of negotiations to get a deal done if everything goes right. If the 2 sides get back into raising tariffs on each other because negotiations aren’t going well, it could take longer to get a deal done. Or one might not get done by the end of Trump’s term.

As you can see from the chart below, the Merrill Lynch fund manager survey shows the trade war has been the top tail risk for all but 2 months since March 2018.

Tuesday - S&P 500 fell 0.34%, Nasdaq fell 0.43%, and Russell 2000 was up 1 basis point.

Citigroup - Wells Fargo - JP Morgan - Personally, I love to buy stocks when they fall on good economic data. This isn’t necessarily the time though. Stocks were very overbought heading into the day.

VIX was up 1.42% to 12.86 which is still very low. CNN fear and greed index managed to fall 2 points to 55 which is neutral. That’s quite something as the S&P 500 is just 0.34% off its record high.

2 worst sectors were energy and technology which fell 1.13% and 0.91%. 2 best sectors were the industrials and materials which rose 0.65% and 0.19%.  

Citigroup - Wells Fargo - JP Morgan - 3 Big Financials Report Results

Let's review the 3 big financials’ earnings results. Goldman Sachs, Wells Fargo, and JP Morgan all reported. Goldman Sachs reported $5.81 in EPS which beat estimates for $4.89. Revenues were $9.46 billion which beat estimates for $8.83 billion.

Investment banking revenue was $1.86 billion which beat estimates for $1.77 billion. That was down 9% and overall revenues fell 2%. Unlike Citigroup, Goldman had a strong showing from equities.

Revenues were up 6% to $2.01 billion. There was increased trading activity because of the market environment.

In response to this quarter, Goldman’s stock was up 1.87%. It’s now up 25.3% year to date. Revenues from fixed income, currency, and commodities missed estimates by $50 million. They came in at $1.47 billion. Goldman’s Marcus business, which is its consumer division, has gained $48 billion in deposits and $5 billion loans.

Wells Fargo also beat estimates on the top and bottom line

Citigroup - Wells Fargo - JP Morgan - But its stock fell 2.98%. It is down 3.49% year to date. The company’s brand took a hit in 2016 when the public found out it created millions of unauthorized accounts.

Prior to that, it was considered to be one of the top banks in America similar to JP Morgan. It was respected because of its relatively solid performance during the 2008 financial crisis.

It’s very easy to avoid using Wells Fargo if you have trust issues with the firm. The company is still trying to find a permanent CEO.

Specifically, the firm reported $1.30 per share in EPS which beat estimates for $1.15. Revenues were $21.58 billion which beat estimates for $20.93 billion. The bank is being crunched by falling interest rates.

Net interest income was $12.1 billion as margins fell 9 basis points to 2.82%. The stock fell because the firm’s expense forecast for the year will hit the high end of its previously announced range of $52 to $53 billion.

Citigroup - Wells Fargo - JP Morgan - JP Morgan beat estimates for revenues and EPS sending its stock up 1.1%.

It is up 15.82% year to date. It had record Q2 profits which were $9.65 billion which is 16% yearly growth. EPS of $2.82 beat estimates by 32 cents.

Tevenues of $29.57 billion beat estimates for $28.9 billion. The firm had a tax benefit of $768 million. JP Morgan predictably had the same issue as Wells Fargo. It cut its 2019 forecast for net interest income by $500 million to $57.5 billion.

JP Morgan is making forecasts based on the Fed cutting rates 3 times. That’s not to say the bank thinks that’s the most likely option. It is being conservative in its judgement. Highest number of rate cuts is probably 3 unless the economy falls off a cliff.

The bank’s CFO stated, “The range of outcomes are incredibly broad in terms of the number of rate cuts, and if those rate cuts end up being insurance cuts that ultimately sustain the expansion or whether they end up being in response to real economic slowdown.”

Treasury Market & Rate Cut Odds

Citigroup - Wells Fargo - JP Morgan - It’s interesting that the very solid retail sales report didn’t have a big impact on the treasury market or rate cut odds.

2 year yield is at 1.84% and the 10 year yield is at 2.11%. I would have expected a big increase in both yields. Odds of a 50 basis point cut in July are now 28.7%. I would have expected that to go to zero after the great retail sales report.

There is a 56.6% chance the Fed cuts rates 3 times this year. There is just a 19.2% chance the Fed cuts 4 or more times. So JP Morgan’s guidance is probably fine. There is upside to that guidance if the Fed cuts rates once or twice. I expect 2 cuts.

Citigroup - Wells Fargo - JP Morgan - Conclusion

Top banks have all beaten earnings estimates. As of July 16th, 86% of financials have beaten EPS estimates on 9.4% growth.

Out of the first 33 S&P 500 firms to report results, EPS growth is 6.18%. The surprise rate is 6.34% and 82% have beaten estimates.

Revenue results have also been great as 76% of firms have beaten estimates with 2.52% growth. So far, so good for Q2 earnings season. 

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