This article is written by Tina Teng & Kelvin Wong, Markets Analysts, CMC Markets APAC & Canada
The US Q1 earnings season will kick start with a bunch of major banks, including JP Morgan Chase & Co, Citigroup Inc, Goldman Sachs Group Inc, Morgan Stanley, and Wells Fargo & Co, due to report their first quarterly results from Wednesday this week. What is expected of their performances and how the markets could react?
A deep decline in investment banking revenue
The US big banks poorly performed in the first quarter after a robust year in 2021, amid a sharp decline in companies acquisitions and IPOs sparked by tightening monetary policy and geopolitical uncertainties, which is seeing a substantial slowdown in investment banking revenue growth. The financial sector fell 4.3% Year to Date as of April 11, with 4 out of 5 above big banks but Wells Fargo & Co down between 10%-16%. According to Bloomberg, the four banks may see a 26% decline in investment banking fees.
The negative impact of a flattening bond yields curve
Additionally, a flattening bond yields curve adds to the worry of a shrinking lending profit margin of these banks, as they can only borrow money at higher rates and lend at lower rates. The briefly inverted US bond yield curves also flash recession signals. Plus, the plan of the Fed’s balance sheet reduction may press on the housing markets, which tend to slow down mortgage activities. Consensus is calling for a 19.2% decline in earnings in the finance sector, with the component of Banks-Major falling 36.2% in the first quarter of 2022, according to Zacks Investment Research.
The second-quarter guidance in focus
Despite all the negatives, as markets have already priced in the poor performance in the first quarter, the future business’s guidance will be the key factor that has a major impact on these stocks’ movements. The outlook for business divisions, such as lending, investment banking, and trading, may differ on how these departments perform and develop. Some positives are that
banks may lift the Q2 outlook for benefiting from rising interests and growing trading activities.
No clear signs of a major bottoming reversal from technical analysis perspectives(click to enlarge chart) (click to enlarge chart)
Source: TradingView as of 8 Apr 2022
Overall, the performance of the US financial sector has been weak (ranked 8th of out the 11 S&P sectors) based on an adjusted momentum scoring system weighted by an absolute and relative basis (versus the S&P 500) from a medium-term horizon.
Within the financial sector, among the 7 major US financial firms, JP Morgan Chase ranked at the top with a positive adjusted combined weightage average momentum score of 0.09.(click to enlarge)
Source: CMC Markets as of 8 Apr 2022
Interestingly, the recent -10.5% decline seen in the share price of JP Morgan Chase (JPM) from its 22 March high has managed to stall and staged a bounce right above the 127.30 key medium-term pivotal support which also coincides with the lower boundary of its major ascending channel from 19 March 2020 swing low area.
If the 127.30 key pivotal support holds, JPM may see a corrective rebound to retest 143.90 in the first step within a major downtrend phase in place since its 25 October 2021 all-time high of 172.95. On the other hand, a break with a daily close below 127.30 invalidates the corrective rebound scenario for a continuation of the impulsive down move sequence towards the next support zone of 110.40/105.86.