CHICAGO, Oct. 20, 2014 /PRNewswire/ -- Zacks.com releases the list of companies likely to issue earnings surprises. This week's list includes Bank of America (NYSE:BAC-Free Report), Apple (Nasdaq:AAPL-Free Report), IBM (NYSE:IBM-Free Report), Coke (NYSE:KO-Free Report) and Caterpillar (NYSE:CAT-Free Report).
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Into the Heart of Q3 Earning Season
The Finance sector gave us a decent start to the Q3 earnings season, with improved investment banking revenues (both trading as well as advisory services) helping offset some of the challenges in the core business. There weren't many surprises on the net interest margin, mortgage lending and loan growth fronts – these have been weak spots for a while and we saw more of the same in Q3 as well.
What came as a pleasant surprise were signs of modest improvement in advisory and trading revenues, with the latter benefiting from the increased market volatility towards the end of the quarter. This has raised hopes that the steady decline in trading volumes and revenues over the last few years isn't reflective of an enduring shift in the industry's dynamics as a result of regulatory changes, but rather a function of the extremely subdued levels of market volatility. Given the extreme volatility in the current period, it will be interesting to see if Q4 trading results will show a similar improving trend.
Total earnings for the 22 Finance sector companies that have reported results already (out 80 total in the S&P 500 index) are down -2.9% on +4.9% higher revenues, with a weak 50% beating earnings estimates and 45.5% coming ahead of top-line expectations. Please note that these 22 Finance sector companies combined account for 47% of the sector's total market capitalization and include all of the major banks and brokers.
This is weak growth and beat ratios in Q3 relative to what we have been seeing from the same group of 22 companies in other recent quarters.
The lower ratio of positive surprises for the Finance sector in Q3 thus far is worrisome, though the sub-par earnings growth pace in the quarter is solely due to the huge Bank of America (NYSE:BAC-Free Report) charge. The comparative growth picture improves materially once Bank of America is excluded from the data.
The market's negative response to otherwise decent banking results likely reflects the recent sharp slide in treasury yields, which makes the operating environment extremely difficult for the group to navigate. Low interest rates squeeze net interest margins that forces banks to make their earnings numbers primarily through cost cuts. Consensus estimates for the current and coming quarters reflect steady improvement in the 'core' business.
It wouldn't be much of a problem if the current downtrend in yields turns out to be a temporary phenomenon. But if rates remain low for longer or start moving even lower (with some calling for the 10-year treasury yield to go to 1.5% in the not-too-distant future), the forward estimates for the sector remain at risk of significant negative revisions. The reason for that is current consensus estimates for the sector reflect a fair amount of improvement in the 'core' banking business, which can only happen if net interest margins start expanding as a result of rising interest rates.
Earnings Calendar (week of October 20th)
We get into the heart of the Q3 reporting season this week, with more than 500 companies releasing results, including 127 S&P 500 members. This week's line-up of reports spans the entire breadth of the U.S. economy – from Apple (Nasdaq:AAPL-Free Report) and IBM (NYSE:IBM-Free Report) to Coke (NYSE:KO-Free Report), Caterpillar (NYSE:CAT-Free Report) and a lot more in the middle.
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