Earnings season is getting kicked off once again with many of the world’s largest financial institutions set to report their first quarter numbers.
Goldman Sachs (GS), Morgan Stanley (MS), Wells Fargo (WFC), and JP Morgan (JPM) are just some of the big names set to release earnings this week. In addition to financial institutions, Delta Air Lines (DAL) will give a first look into how airlines are performing with vaccines being distributed at a much higher rate than last quarter. Finally, some other big names reporting their quarterly earnings this week are Bed Bath & Beyond (BBBY), PepsiCo (PEP), UnitedHealth (UNH), and Rite Aid (RAD).
What Are Banks Saying About The Economy?Banks make up a large portion of earnings heading into the first week of the season with Citigroup (C), Bank of America (BAC), Ally Financial (ALLY), and Truist (TFC) reporting in addition to those listed above. All these firms reported better than expected earnings last quarter and most significantly outperformed estimates by analysts. For the most part analysts expect these institutions to have higher earnings per share this quarter than last due in part to large stimulus and vaccination efforts that have continued the reopening process of the economy and also to volatility in equity and fixed-income markets, as well as the boom in Special Purpose Acquisition Vehicles during the first quarter.
Those large spending bills have some investors concerned about inflation but the Fed has consistently downplayed the chances of that happening. Recent consumer price index (CPI) data helped quell some of those concerns as well. CPI for the month of March rose 0.6%, slightly above estimates of 0.5% (core CPI rose 0.3%). The new data was positive after the producer price index (PPI) rose 1% last month while analysts expected a similar 0.5% increase. With many investors focusing on inflation concerns, traders should be aware of the base effect which is likely to make inflation numbers appear higher than it actually is in the coming months.
Price indices fell last March and April when the coronavirus was declared a pandemic and wrecked the global economy. Thus, price index data for the month of April and even May are going to be higher than usual on a year-over-year basis since current data will be compared to those down months last year. The month-over-month data will be of more use for how inflation is currently trending. For example, if CPI remained flat over the month of April, then it would still be up 2.6% annually. In contrast, CPI was up only 1.3% year-over-year in February while still rising 0.4% month-over-month.
In addition to seeing what banks are saying about inflation, investors should be looking at reserves. The Big Six (JPM, BAC, C, WFC, GS, and MS) held roughly $96 billion against possible loan losses last quarter which was nearly double the reserves pre pandemic. The increase in reserves during the pandemic logical and some expected an even bigger increase, but actual losses so far are well below that $96 billion number. With vaccines being distributed at a much higher rate, The Wall Street Journal currently estimates that 75% of the U.S. population will be vaccinated by June 7, and more stimulus packages coming out, banks are expected to release a significant portion of the cash in their reserves, which will flow through to earnings.
Airline TrendsBanks aren’t the only firms releasing quarterly earnings this week with Delta Air Lines being the first major carrier to report first-quarter numbers. The earnings estimates remain very bleak with EPS estimates at -$2.84, which would be lower than the prior quarter’s holiday travel season when Delta reported EPS of -$2.53. That -$2.84 earnings per share looks much worse when compared to last year’s first quarter EPS of -$0.51.
Far more people are traveling this time of year than last but numbers remain far lower than in 2019 despite strong vaccine efforts. TSA screenings average roughly 1.5 million per day currently, far above nearly 100,000 average last year but still only about 60% of 2019 where screenings averaged around 2.5 million. The good news going forward for airlines is that screenings were around 700,000 for most of January and have already doubled in those three months. However, the numbers for the first quarter were likely pretty soft as vaccines are becoming much more available only recently.