Earnings

Weekly Market Preview: Stocks At Record Highs Ahead of Q4 Earnings (BAC, C, JPM, WFC)

Traders - Michael Nagle / Bloomberg
Credit: Michael Nagle / Bloomberg

It would seem "cautious optimism” is now the tenor of the stock market as fourth quarter earnings are set to kick off. After briefly topping the 29,000 milestone, the Dow Jones Industrial Average took a nosedive, indicating things won’t be as easy as they were for stocks in the last three months of 2019. It will take impressive earnings beats and confident guidance to keep the momentum going.

On Friday stocks ended lower, weakened by a December jobs reports that showed slower-than-expected U.S. jobs and wage growth. That’s not how investors expected the year’s first jobs report to start off, killing the euphoria and sending the Dow lower by 133.13 points, or 0.5%, to close at 28,823.77. The S&P 500 index lost 9.35 points, or 0.3%, to close at 3,265.35, while the tech-heavy Nasdaq Composite Index closed down 24.57 points, or 0.3%, end Friday’s session at 9,178.86.

Notably, Friday’s declines came after all three major averages posted new intraday highs. This highlights the fact that while key economic indicators suggests the U.S. economy is strong and will remain that way, that’s not a guarantee for higher stock prices. The U.S. economy added 145,000 new jobs in December, according to the U.S. Labor Department, falling short of the 165,000 economists were expecting. It’s also less than the 266,000 jobs added in November.

Although the data still kept the unemployment rate near a 50-year low at 3.5%, analysts aren't ready to proclaim stocks are cheap, particularly as benchmarks — which all posted gains for the week — are still near all-time highs. But we've seen time and time again that valuation arguments can fall on deaf ears and are often in the eye of the beholder. Investors could quickly forget the downbeat jobs data with upbeat 2020 guidance when earnings results begin this coming week. Here are the names to keep an eye on.

Citigroup (C) - Reports before the open, Tuesday, Jan. 14

Wall Street expects Citigroup to earn $1.84 per share on revenue of $17.89 billion. This compares to the year-ago quarter when earnings came to $1.61 per share on revenue of $17.12 billion.

What to watch: While investors have grown concerned about a global growth slowdown, which could impact Citigroup given the bank’s global reach, its management has worked to reduce its high-risk and illiquid assets. These moves have revived Citigroup’s revenue and its return on tangible equity. What’s more, Citigroup’s net interest income (operating income) will continue to trend higher as it benefits from sustained growth in loans and deposits.

JPMorgan Chase (JPM) - Reports before the open, Tuesday, Jan. 14

Wall Street expects JPMorgan to earn $2.34 per share on revenue of $27.92 billion. This compares to the year-ago quarter when earnings came to $1.98 per share on revenue of $26.8 billion.

What to watch: Commercial bank stocks have not performed as well as prior estimates suggested, given that the Fed has adopted a new stance on monetary policy. Lower interest rates, while good for the consumer, makes it tough for banks to earn money on loans and deposits. But that hasn’t stopped JPMorgan Chase from beating Wall Street revenue and earnings estimates in three straight quarters. Investors have nonetheless applauded the banks decision to take on the discount brokers with its new commission-free arrangement. It would appear JPMorgan’s investment banking division has surpassed its "traditional" banking segment in terms of future growth. Can this continue?

Wells Fargo (WFC) - Reports before the open, Tuesday, Jan. 14

Wall Street expects Wells Fargo to earn $1.12 per share on revenue of $20.12 billion. This compares to the year-ago quarter when earnings came to $1.21 per share on revenue of $20.98 billion.

What to watch: Is it still worth holding Wells Fargo, one of Warren Buffett’s favorite high-yield dividend stocks, which pays out 4.12% yield? Baird analyst David George recently downgraded Wells Fargo to Underperform from Neutral, citing valuation concerns amid what he calls “later-cycle risks.” In Q3 the Wells Fargo, which tapped Charles Scharf, formerly CEO of Bank of New York Mellon as its new CEO, missed EPS estimates by 11 cents, while beating on revenue. Scharf will need to instill confidence that the bank can move beyond its various scandals and set a new tone towards growth and stability.

Bank of America (BAC) - Reports before the open, Wednesday, Jan. 15

Wall Street expects BAC to earn 68 cents per share on revenue of $22.38 billion. This compares to the year-ago quarter when earning were 70 cents per share on revenue of $22.89 billion.

What to watch: Bank of America has beaten earnings estimates in twelve straight quarters and the company’s stock has been rewarded handsomely, gaining 43% in 2019. The bank has benefited from its focus on consumers and lending given the strength of the economy and consumer confidence. Bank of America's consumer segment made up more than 40% of its Q3 revenue. On Wednesday investors will want to see the extent to which these positive metrics can continue to rise, specifically with loan and deposit growth. Analysts will also look to gauge how other parts of the business such as investment banking can support top-line growth and profits.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Richard Saintvilus

After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.

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