• US banks kick off Q2 earnings on Friday before opening bell

• Results expected to vary based on each bank’s characteristics

• Multiples remain compressed despite stock outperformance

Strong first half

As always, the US earnings season begins with banks announcing their financial results, which are often seen as a proxy for the health of the broader economy. For the second quarter of 2024, the financial sector is projected to post a 6.7% profit growth compared to the same period last year, extending its streak of solid quarterly earnings releases.

The belief that the US economy is headed for a soft landing has boosted bank stocks since the start of the year as the anticipated wave of non-performing loans has been avoided. Looking at the stock performance, the examined banks have managed to outperform the S&P 500 index in 2024 despite lagging against growth-oriented sectors.

Focus on interest rate trajectory and M&A resurgence

Moving forward, the path of interest rates in the US as well as the health of the economy will play a huge role in banks’ performance. For now, the relatively high interest rates have allowed the banks to continue to capitalize on wide net interest margins, albeit not as much as last year.

On the other hand, high interest rates could prove to be lethal for financial institutions as they are currently sitting on a pile of unrealised losses in their bond portfolios. Hence, if banks are forced to sell those fixed assets to acquire liquidity during a systemic event, we could see another episode like the regional banking crisis in March 2023.

On the brighter side, the sector is starting to experience a rebound in M&A and dealmaking activities, which have been largely suppressed in the past couple of years. Jeffries’ Q2 earnings reinforced this notion, but the market is still in the early stages of recovery. Meanwhile, revenue streams from trading remain strong as the stock market is rallying to consecutive record highs.

JP Morgan’s outperformance frays

JP Morgan was the best performing bank in 2023, recording the biggest annual profit in US banking history. However, the huge financial institution is expected to show some signs of weakness in this earnings season as it is going to face a tough year-ago comparison.

Specifically, earnings per share (EPS) of the banking behemoth are estimated to have taken a hit, dropping 16.0% from a year ago to $4.18, according to consensus estimates by LSEG IBES. Meanwhile, the bank is anticipated to record its first year-on-year revenue decline since the first quarter of 2022, with its figure expected at $42.15 billion, which would constitute a marginal 0.57% drop.

Wells Fargo set for mixed results

For Wells Fargo, the fundamental picture looks relatively mixed. The bank is set to report higher profits despite an expected 7.84% decrease in its net interest margin, while at the same time recording a deterioration in its revenue figure.

Specifically, the bank’s revenue is on track to fall by 1.34%, reaching $20.25 billion. However, EPS is forecast to jump from $1.25 in the same quarter last year to $1.29, marking a 3.12% increase.

Citigroup’s major restructuring starts to pay off

Citigroup is expected to have a solid quarter as its costly restructuring has been slowly coming to fruition. That’s also reflected in its stock price, which has gained almost 30% since the beginning of the year, largely outpacing major benchmarks.

The investment bank is set to post an annual revenue increase of 3.28% to $20.08 billion. Moreover, its EPS is projected at $1.39, growing 1.57% relative to the same quarter last year.

Discount in valuations persists

Although bank stocks have rallied hard since the beginning of the year, their valuations remain relatively subdued. Banks have not yet reached their pre-pandemic multiples even in a period of elevated interest rates, which is considered beneficial for financial institutions. At the same time, the S&P 500 is trading at more than 21 times forward earnings, way above its historical averages.

That said, the risks seem asymmetric at current levels as there might not be much downside even if we get a major negative surprise in upcoming earnings reports, considering how cheap valuations are.