Weekly Preview: Earnings to Watch This Week 4-10-22 (C, DAL, JPM, WFC)

Stocks ended Friday’s trading session mostly mixed, driven by fears of rising inflation and rising interest rates. Analysts at Bank of America, meanwhile, fanned the flames by predicting the U.S. economy would suffer a recession. In a note to clients Friday BofA analyst Michael Hartnett wrote “Inflation causes recessions and inflation is out of control.”

Among his many predictions, Hartnett expects the S&P 500 to fall below 4,000 this year. The S&P 500 fell 0.27% Friday to 4,488.28. Assuming Hartnett’s bearish call proves true that means a potential decline of almost 11% from current levels. Hartnett’s and his team sees EPS growth forecast for the S&P 500 to turn negative, while he expects the ISM manufacturing index to fall below 50. A reading below 50 in the ISM suggests a recession.

So it’s not surprising that technology stocks, a sector heavily reliant on growth, struggled Friday. It also hasn’t helped that the bond yields kept rising. The 10-year Treasury yield surged on Friday to pandemic-era high, rising 2.71%. Accordingly, the tech-heavy Nasdaq Composite Index declined 186.30 points, or 1.34% to close at 13,711.00. That’s because tech companies, many of which have high P/E ratios, will produce profits that are less valuable in future as long-dated bond yields increase. In this environment, a bet on tech is not wise.

The Dow Jones Industrial Average, however, was seen as a safe haven. The blue-chip index gained 137.55 points, or 0.40% to close at 34,721.12. For the week, the Dow was the best performer, losing just 0.3%, while the S&P 500 and Nasdaq Composite lost 1.3% and more than 3%, respectively. The Nasdaq, which lost 4% last week, continued to struggle. These declines come despite what I would consider upbeat economic and labor data. It still appears that stocks, in general, are looking for direction.

The Fed minutes from Wednesday confirms that the $95 billion per month bond-buying program will be reduced. Coupled with the likelihood that short-term interest rates could be raised by 50 basis points, instead of the standard 25 basis points, there will likely be more pain in the market before things get better. As such, investors are de-risking. For those who have been on the sidelines, this could be a buying opportunity, focusing on big-cap winners.

Earnings season begins to move into a higher gear this week, with the big banks coming out with their reports. With that, here are the stocks I’ll be watching this week.

Delta Airlines (DAL) - Reports before the open, Wednesday, Apr. 13

Wall Street expects Delta to lose $1.36 per share on revenue of $8.78 billion. This compares to the year-ago quarter when the loss came to $3.55 per share on $3.91 billion in revenue.

What to watch: Airline stocks have lost plenty of altitude over the past several weeks, seemingly caught between two events: Aside from Russia's invasion of Ukraine, which has threatened the stability of the global jet fuel market — this is important given that fuel costs often make up to a third of airlines' total expenses — airlines must now face the prospect of higher interest rates. And that’s an ominous prospect given the debt levels they often carry. In the case of Delta Airlines, which has $24.5 billion in debt, rising rates mean higher payments. While its operating cash flow has improved in recent quarters, so has its debt. The company posted a loss last quarter mostly due to rising fuel costs. In other words, just when it appeared that the airlines were about the recover from the devastation caused by the pandemic, they now must navigate this crisis. For Delta, which ended 2021 on a positive note, the company desperately needs an increase in travel demand to grow its profits so it can pay down debt. As such, on Wednesday the market will want to see whether these areas can fundamentally improve.

JPMorgan Chase (JPM) - Reports before the open, Thursday, Apr. 14

Wall Street expects JPMorgan to earn $2.69 per share on revenue of $31.08 billion. This compares to the year-ago quarter when earnings came to $4.50 per share on revenue of $30.52 billion.

What to watch: JPMorgan, which offers a nice mix of earnings growth, income and value, has enjoyed a well-deserved reputation as being the best-executing bank among its peer group. The bank is intricately tied to the U.S. and to some extent, the global, economy, given its status as the country’s largest bank. As such, inflationary pressures on consumers presents a potential headwind, though consumer balance sheets are currently strong and bookended by wage increases. Plus, the Federal Reserve has begun to raise interest rates, which bodes well for JPMorgan’s top and bottom forecasts and its net interest margins. In that vein, the company, during its Q4 conference call, spooked investors by forecasting operation expenditures that were significantly higher than analysts expected. The management team has a solid reputation for capital deployment, and thus I believe the spending should be viewed as investments that are intended to help the bank maintain its leadership position and its ability to outperform its peer group. Areas like technology, marketing, and its organic expansion initiatives to develop new branches/loan offices have yielded solid results so far. Combined with its 2.50% dividend yield, which has grown at an average of almost 8% over the last five years, JPMorgan looks like a solid opportunity ahead of earnings.

Wells Fargo (WFC) - Reports before the open, Thursday, Apr. 14

Wall Street expects Wells Fargo to earn 80 cents per share on revenue of $17.79 billion. This compares to the year-ago quarter when earnings were $1.02 per share on revenue of $18.06 billion.

What to watch: Not surprisingly, due to the prospects of higher interest rates, bank stocks have outperformed several other sectors in the first three months of the year. But what you might not know is that Wells Fargo stock has outperformed shares of Bank of America (BAC), JPMorgan Chase (JPM), and Goldman Sachs (GS) in the previous 52-week period and year-to-date. It has also beaten the S&P 500 index in both spans. With the Fed recently introducing the first of many expected interest rate hikes this year, investors are now more willing to look beyond the bank’s legacy issues and focus on its long-term potential. As it stands, the market now now expects Wells Fargo to deliver strong growth in both top and bottom lines, thanks to the bank’s cost-saving initiatives and the expected economic rebound. There’s also the $20 billion worth of buybacks the bank is expected to execute over the next twelve months, thanks to its much stronger balance sheet and efficiency ratios. Having already beaten analyst EPS expectations in seven of the previous eight quarters, Wells Fargo on Thursday can answer the question as to whether the worst is finally behind it.

Citigroup (C) - Reports before the open, Thursday, Apr. 14

Wall Street expects Citigroup to earn $1.65 per share on revenue of $18.29 billion. This compares to the year-ago quarter when earning were $3.62 per share on revenue of $19.33 billion.

What to watch: Commercial bank stocks including Citigroup have seen a strong rebound amid the recent rise in U.S. Treasury yields. Whether or not this surge continues remains to be seen. But it's important to note that the recent uptick in yields comes at a time when the Federal Reserve has begun to raise interest rates. Combined with the idea of less accommodative monetary policy and a tightening cycle, bank stocks are poised to outperform the broader market during the first half of the year. In the case of Citigroup, the bank has tons of ground to make up when compared to its peers. Citigroup has been pressured by regulators to resolve issues related to internal controls regarding compliance, data, and risk management, including being levied a $400 million fine and a cease-and-desist order. But as the fourth-largest bank in the U.S., there is still an attractive business here. What’s more, the bank currently trades at roughly 80% of its tangible book value. That combined with an attractive dividend yield of 3.1%, along with a potential boost in the share buyback makes Citi a stock to own in 2022.

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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