Downbeat first quarter earnings result and guidance from some of the world’s largest banks such as JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC) suggests that despite the resilience of the U.S. economy, investors are still worried about factors such as inflation and geopolitical concerns.
On the heels of its Q1 results, JPMorgan stock lost more than 5% after the bank warned that its net interest income — a key measure of bank profitability through lending activities — could fall short of Wall Street estimates for 2024. Persistent inflationary pressures were cited as key risks by JPMorgan CEO Jamie Dimon. Meanwhile, Citigroup stock dropped more than 1% despite posting a top-line beat, while Wells Fargo fell about 1%.
The declines in these banks extended to the broader indexes, with the Dow Jones Industrial Average tumbling 581 points during the session, booking its largest weekly loss in more than a year as investors worried over new inflation data coupled with geopolitical tensions in the Middle East. On Friday, the Dow declined 475.84 points, or 1.24%, to close at 37,983.24. Leading the decline on the Dow were, among others, Microsoft (MSFT), Intel (INTC) and IBM (IBM) and Salesforce (CRM).
The S&P 500 Index gave up 75.65 points, or 1.46%, to close at 5,123.41, while the tech-heavy Nasdaq Composite declined 267.10 points, or 1.62%, to close at 16,175.09. On a weekly basis, the Dow lost 2.7%, while the S&P 500 Index gave up 1.6%. The Nasdaq suffered the least decline, losing just 0.5% for the week. Investors have been looking for reasons to lock in profits and reduce risk exposure, and that opportunity came with inflation data suggesting the economy’s still pretty hot.
Although there continues to be a firm belief that the Federal Reserve should begin cutting rates, it is now less clear with that rate reduction will begin. Whether the market losing streak continues broadly depends on the earnings results that are released in the next several weeks. Entering the quarter, earnings estimates have remained somewhat steady, creating a low bar for companies to beat.
Here are three key earnings I’m watching this week:
Bank of America (BAC) – Reports before the open, Tuesday, Apr. 16
Wall Street expects BAC to earn 71 cents per share on revenue of $23.45 billion. This compares to the year-ago quarter when earning were 94 cents per share on revenue of $26.39 billion.
What to watch: Bank stocks might have outperformed the broader S&P 500 Index over the past six months, but the first three months of the year has yielded a different result. Although the U.S. economy has remained resilient, the financial sector has underperformed the broader S&P 500 index is part due to the expected decline of interest rates.
Bank of America stock has risen 7% year to date, trailing the 8% rise in the S&P 500 index. Ahead of its Q1 results, the bank’s ability to sustain strong net interest income revenue with interest rates at or near their peak will be closely-watched. BofA’s net interest income (fully tax equivalent) is estimated to be $14 billion, down from $14.1 billion in Q4 and $14.6 billion in Q1 2023.
Elsewhere, analysts will focus on provisions for credit losses, which will provide a window into how well banks in general expect the economy to hold up. Guidance for the next quarter and full year will also be a critical factor, perhaps more than the Q1 result itself. Having beaten earnings three times in the past four quarters, the bank’s focus on consumers and lending has been key to its success.
On Tuesday, investors will want to see these positive trends continue, specifically within loan and deposit growth. Toward the end of quarter, loan growth for large banks seemingly evaporated. Investors will look to see if Bank of America can meet its low-to-mid-single digit loan growth target for the year. Analysts will also look to gauge how other parts of the business such as investment banking can support top-line growth and profits.
Alcoa (AA) – Reports after the close, Wednesday, Apr. 17
Wall Street expects Alcoa to lose 52 cents per share on revenue of $2.58 billion. This compares to the year-ago quarter when the loss came to 23 cents per share on revenue of $2.73 billion.
What to watch: Shares of the aluminum giant have been one of the bright spots in the materials sector so far this year, rising more than 30% over the past six months, including 22% over the past thirty days. Already up 9% year to date, besting the 8% rise in the S&P 500 index, Alcoa has a lot to prove.
The rise in metal stocks have been driven by, among other things, a spike in prices for aluminum and other base metals on the heels of Federal Reserve’s dovish policy meeting. Improving demand prospects from China, a top consumer, has also driven aluminum prices higher. In the first two months of the year, an estimated 720,000 tons of unwrought aluminum and products were imported by China, rising more than 90% year over year.
In a Reuters interview, Marex metals strategist Alastair Munro said, “Money is coming in and we have seen evidence of that first in copper but more recently in aluminum.”
How much of that money will come to Alcoa? Aluminum is used in a broad range of industrial and consumer end markets. And the commodity is enjoying a strong run as the global economy swings back into motion. As a result, Alcoa last quarter posted its second double-beat in three reporting periods, thanks to improving aluminum business. While there appears to be support for higher aluminum prices, the company on Wednesday must speak positively about the demand/supply outlook for the next several quarters to keep Alcoa stock in high demand as it has been.
Netflix (NFLX) – Reports after the close, Thursday, Apr. 18
Wall Street expects Netflix to earn $4.16 per share on revenue of $8.54 billion. This compares to the year-ago quarter when earnings were $2.88 per share on $8.16 billion in revenue.
What to watch: Since the start of the year, Netflix stock has been one of the better performing names in large-cap tech, rising 30% year to date, besting the 9% rise in the S&P 500 index. Expand that horizon by six months, and the stock is up some 72%, compared to the 18% rise in the S&P 500 index.
And there is more upside in the stock, according to analyst Jeffrey Wlodarczak at Pivotal Research who, while citing “continued solid momentum in the core business,” raised its price target to a new Wall Street high.
“We expect another solid result in 1Q as NFLX highlights their ability to grow even while taking material price increases,” Wlodarczak wrote in an investor note while reiterating his Buy rating and boosted his price target to $765 from $700. From current levels of $628, this assumes additional gains of close to 22%.
The company’s growth initiatives have begun to pay dividends. Not only is the company’s efforts to grow its ad-supported tier working, its management has also implemented ways to crackdown on password sharing. Netflix management expressed confidence in their growth strategy, saying, “We believe we have a clear path to reaccelerate our revenue growth: continuing to improve all aspects of Netflix, launching paid sharing and building our ads offering.”
Combined with the company’s upcoming content launches, there is a compelling case to remain invested in the stock. These assumptions will be answered when Netflix issues its guidance forecast for the next quarter and full year.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
