Wednesday, July 16, 2014
Earnings remain front and center in today’s session, with the finance-heavy results thus far largely in the “positive and reassuring” category. Continuation of this favorable trend over the next couple of weeks will likely do more for this market than any other factor.
The unexpected legal charge in the Bank of America (BAC) report this morning aside, the bank’s results are largely in-line with the trend that we have been seeing from its peers in the last few days. Litigation charges have been, and remain, a recurring part of the too-big-to-fail banks’ business model, with the issue particularly acute in the Bank of America case which had an even bigger charge last quarter. Unlike Citigroup (C) and J.P. Morgan (JPM), BofA still hasn’t come to terms with the Justice Department on what is expected to be the last piece on the litigation front.
Investors will likely struggle with making sense of the bank’s big litigation charge today, but the core business results aren’t materially different from those of its peers. While mortgage business is down along the lines of what we have been seeing from its peers, the bank’s trading business actually did better than what we saw from J.P. Morgan and Citigroup in recent days. Less exposure to interest rate and foreign exchange products and a bigger presence in the mortgage and municipal bond markets relative to its peers helped Bank of America report growth in trading revenue while all of its peers saw trading revenues decline in Q2.
Including this morning’s reports, we now have Finance sector results from 36.4% of the sector’s total market capitalization, with total earnings up +2.1% on -2.6% lower revenues, with 90% beating EPS estimates and 60% beating top-line estimates. For the S&P 500 as whole, we now have Q2 results for 43 of the index members that combined account for 13.7% of its total market capitalization. Total earnings for these 43 companies are up +7.4%, with 69.8% beating EPS estimates, while total revenues are up +2.8% and 60.5% have beat revenue expectations. In terms of growth rates and surprises, this is better performance than we have seen from this group of 43 companies in recent quarters.
The composite or blended Q2 growth picture for the S&P 500 as a whole, combining the actual results from the 43 companies that have reported with estimates for the still-to-come 457 reports, shows total earnings growth of +4.8% on +1.6% higher revenues and modest gains in net margins. We will see how the rest of this earnings season unfolds, but not a bad start to the Q2 reporting cycle.
Director of Research
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