S&P 500 Financials Sector Q2 Earnings Preview: Banks Expected to Report Largest Decline

The Financials sector will be a focus for the market during the next two weeks, as over 40% of the S&P 500 companies that are scheduled to report earnings for the second quarter over this period are part of this sector. Companies in the Financials sector that are expected to report earnings during these two weeks include Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo. The Financials sector is predicted to report the seventh-highest (year-over-year) earnings growth rate of all eleven sectors for Q2 2024 at 4.3%.

At the industry level, three of the five industries in the sector are expected to report year-over-year earnings growth, led by the Insurance industry at 31% and the Capital Markets industry at 23%. These two industries are also expected to be the largest contributors to year-over-year earnings growth for the sector. If the Insurance and Capital Markets industries were excluded, the Financials sector would be expected to report a (year-over-year) decline in earnings of -6.4% rather than a year-over-year increase in earnings of 4.3%.

Within the Insurance industry, four of five sub-industries are expected to report year-over-year earnings growth: Property & Casualty Insurance (95%), Reinsurance (22%), Insurance Brokers (15%), and Life & Health Insurance (6%). On the other hand, the Multi-line Insurance (-16%) sub-industry is the only sub-industry in the industry predicted to report a year-over-year decline in earnings.

Within the Capital Markets industry, all three sub-industries are expected to report year-over-year earnings growth: Investment Banking & Brokerage (53%), Financial Exchanges & Data (10%), and Asset Management & Custody Banks (10%).

The other industry expected to report year-over-year earnings growth in the sector is the Financial Services industry at less than 1%. Within this industry, the Transaction & Payment Processing Services sub-industry is projected to report year-over-year earnings growth of 5%, while the Multi-Sector Holdings sub-industry is projected to report a year-over-year decline in earnings of -7%.

On the other hand, two industries in the sector are expected to report a year-over-year decline in earnings, led by the Banks industry at -10%. This industry is also expected to be the largest detractor to year-over-year earnings growth for the sector. If the Banks industry were excluded, the estimated earnings growth rate for the Financials sector would increase to 14.8% from 4.3%. At the sub-industry level, both the Regional Banks (-26%) and Diversified Banks (-9%) sub-industries are expected to report year-over-year declines in earnings.

Sean Ryan, VP/Associate Director for the banking and specialty finance sector at FactSet, highlighted a number of key themes and metrics to watch for banks in the S&P 500 during this earnings season:

Bank earnings season begins on Friday, July 12, and in the broad contours, is apt to look remarkably similar to the first quarter.

The interest rate environment remained a marginal negative in the second quarter, albeit slightly less so than in the first; the 10 year Treasury yield rose 17bps to 4.37%, suggesting further OCI losses (though perhaps a bit less than in the first quarter, when the 10 year yield rose 32bps). At the short end of the curve, markets continue to chase the prospect of rate cuts as they recede ever further into the horizon. Yet hope springs eternal, and Fed Funds futures currently price in 25-bp cuts at the September and December FOMC meetings, down from the 3 2024 cuts that were priced in a quarter ago.

Net interest income should be restrained by sluggish loan growth, but on the positive side, the bottoming process for net interest margins continues to play out, with another tranche of banks likely to post their first increases of this cycle, and more likely to guide to future increases.

Noninterest revenues should be mixed. Investment banking revenues will again be restrained by weakness in M&A as the market continues to await a resurgence in sponsor-led activity. Mortgage banking should see a benefit from higher origination activity, including refis (despite the slightly higher interest rates). Wealth and asset management results should again enjoy a tailwind from the 3.9% gain posted by the S&P 500 during the quarter (albeit a smaller one than last quarter when the index rose 10.2%) though the long term headwind of active flows of course persists.

Credit will remain a headwind, though less so than some of the more sensational reporting around commercial real estate might lead one to believe. CRE and credit cards (particularly in the less affluent segments) should again be the drivers of provisioning, though the higher-longer rate environment raises the probability of rising C&I problems among borrowers with balance sheets that were too long configured for ZIRP.

Estimates for the second quarter appear to have taken account of some of the incremental negatives, having trended down during the quarter, though of course whether they have adjusted appropriately, by too much or by too little remains to be seen.

For more commentary and analysis on the banking industry, please see Sean's articles on the FactSet Insight blog.

The other industry expected to report a year-over-year decline in earnings is the Consumer Finance industry at -1%.

Looking ahead, analysts are predicting earnings growth rates for the Financials sector of 0.4%, 40.9%, and 5.9% for Q3 2024, Q4 2024, and Q1 2025, respectively.

The FactSet Earnings Insight report was published two days early on July 3 due to the July 4 holiday. The next edition of the report will be published on Friday, July 12.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.

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