Earnings Season Gets Underway With JPM, WFC and C on Friday

Earnings season kicks off with reports from JP Morgan, Wells Fargo, and Citigroup on Friday, Oct. 12. Here’s a look at what’s been going on at the big banks and what might be expected from their quarterly reports.

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It looks like the start of earnings season will be marked with some bouts of volatility as the big banks get ready to kick things off. JP Morgan (JPM), Wells Fargo (WFC), and Citigroup (C), three of the four largest U.S. banks by assets, all report before market open on Friday, Oct. 12. 

After Wednesday’s sharp sell-off, the financial sector is now lower for the year, with underperformance from investment banks and asset managers as well as many of the larger, diversified banks.  

While there have been a lot of positives for the sector, some analysts are starting to question how long the economy can grow at this pace, and how long corporations and consumers can maintain demand for loans. Rising interest rates have seemed to help the sector early this month, but it hasn’t escaped the selling pressure that put the entire market on its heels so far this week. 

As always with big bank earnings, some of the factors to consider listening and watching for are trading volume, corporate lending strength or weakness, and executives’ take on the economy, interest rates, and consumer health. In Q2, if you’ll recall, JPM’s earnings generally impressed analysts, but WFC and C had mixed results. C struggled with fixed income trading, while WFC’s earnings and revenue came up short of Wall Street analysts’ estimates.

It’s likely that interest rates and Treasury note yields might get some attention in the earnings calls, either from the executives or from analysts in the Q&A. They might also be asked to comment on the psychology of the stock market after some panic seemed to grab hold of things late Wednesday. While heightened volatility can be a good thing for banks’ trading departments, a consistent trend typically doesn’t provide banks with as many opportunities to profit. 

Though the current market mood seems kind of dreary, remember that we’re heading into what looks like another strong earnings season, as well as awaiting the first government read on Q3 economic growth later this month. Those could end up being catalysts for investors looking beyond the interest rate story. At this point, many analysts still expect to see earnings rise around 20% in Q3, with revenues up 7%. Those would be strong numbers if they do show up, but we’ll have to wait and see.

Mixed Performances. JPM is charted above, compared to WFC (purple line) and C (teal line). Year-to-date performance as a percentage is shown on the right-hand side.  Chart source: thinkorswim® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

JP Morgan Earnings and Options Activity

JPM is expected to report adjusted EPS of $2.25, up from $1.76 in the prior-year quarter, on revenue of $27.5 billion, according to third-party consensus analyst estimates. Revenue is projected to increase 4.9% year over year. 

Around the earnings release, options traders have priced in a 3% ($3.40) stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility was at the 65th percentile as of this morning.

In short-term trading at the Oct. 12 weekly expiration, trading on the call side has been spread out between the 115 to the 118 strike prices, while activity on the put side has been concentrated at the 110 and 112 strikes. 

At the Oct. 19 monthly expiration, recent activity on the call side has been heavier at the 115 and the 120 strikes, while 109 and 110 strikes on the put side have been more heavily traded. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Wells Fargo Earnings and Options Activity

WFC is expected to report adjusted EPS of $1.17 on revenue of $21.9 billion, according to third-party consensus analyst estimates. In the same quarter last year, it reported adjusted EPS of $0.84 on revenue of $21.93 billion. 

Options traders have priced in a 3% ($1.60) stock move in either direction around tomorrow’s earnings release, according to the Market Maker Move indicator. Implied volatility was at the 77th percentile as of this morning. 

In recent options trading at the Oct. 12 weekly expiration, calls have been active at the 52.5 strike price, while volume has been lighter on the put side and concentrated between the 52 and the 54 strikes.

At the Oct. 19 monthly expiration next week, most of the activity has been right around where the stock’s been trading at. On the call side, trading has been heavier between the 52.5 to the 54.5 strike prices and has been concentrated at the 50 and 52.5 strikes on the put side. 

Citigroup Earnings and Options Activity

C is expected to report adjusted EPS of $1.69, up from $1.42 in the same quarter last year, on revenue of $18.45 billion, according to third-party consensus analyst estimates. Revenue is projected to increase 1.5% year over year. 

Around the upcoming earnings release, options traders have priced in a 2.75% ($1.93) stock move in either direction, according to the Market Maker Move indicator. Implied volatility was at the 76th percentile as of this morning. 

At the Oct. 12 weekly expiration, recent trading on the call side has been heavier at the 71 strike price, as well as the 72 and the 72.5 strikes. For puts, trading has been mostly concentrated at the 70 and 71.5 strikes. 

In short-term trading at the Oct. 19 monthly expiration, most of the activity has been at strikes right around where the stock has been trading. The 70 and 72.5 strikes have been active on the call side and the 67.5 and the 70 strikes have been active on the put side. 

What’s Coming Up

The bank earnings parade continues next week with Goldman Sachs (GS), Bank of America (BAC), and Morgan Stanley (MS). 

Later in the month, the government read on Q3 economic growth will come out. That data, combined with a steady stream of earnings reports over month, could end up being catalysts for investors looking beyond the recent climb in interest rates. 

Good Trading,
JJ
@TDAJJKinahan

Call Us
800-454-9272

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