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Quarterly earnings season is a test for Wall Street!

Quarterly earnings season is a test for Wall Street!

created Lukasz KlufczynskiApril 13 2023

This will be an exceptional quarterly earnings season for US banks. It is expected that the crisis in banking, which began in March with the collapse of the Silicon Valley Bank, will have a major impact on results and forecasts.

As always, banks' quarterly results and their full-year projections will be watched closely as these numbers are economic harbingers. The analysis of bank stocks, which will kick off the earnings season this year, will be even more this time around more insightful about the two biggest bank failures since the 2008 financial crisis. Investors will be analyzing balance sheets to determine which lenders attracted or lost deposits during the March banking crisis, while also assessing its impact on lending and the U.S. economy.

The results will give a picture of how easily lenders can finance operations and whether they have enough cushion to deal with shocks. Concerns about the level of capital and liquidity of banks are likely will last for at least the next few months due to recent tensions.

An old stock market saying says "there is no boom without banks"

The first quarter 2023 earnings season kicks off tomorrow when Wall Street megabanks will release their results. We may then witness a turning point for the stock market. Most Wall Street banks likely to report lower quarterly profits and will face bleak prospects for the rest of the year. Goldman Sachs is set to experience a 20% drop in earnings per share due to problems in investment banking, which saw a 69% drop in earnings in the fourth quarter.

Banks may have benefited from cheap deposits as savers shifted from smaller lenders after the collapse of Silicon Valley Bank last month, but they are likely to face lack of credit growth and declining credit quality, forcing them to add reserves to protect against potential losses. It is predicted that the six largest US banks will see a 30% increase in net interest income compared to the previous year, because they will earn more from interest payments by borrowers than they will pay to depositors. However, profits from interest payments can be offset by bad loans.

The upcoming results of the banks will therefore be carefully analyzed by investors to assess their ability to finance their operations and whether they have sufficient reserves for unforeseen circumstances. The results will also provide a picture of lenders' ability to attract or lose deposits during the March banking crisis and the impact it had on lending and the overall US economy. Banks are expected to reveal a difficult earnings season due to the recent stresses that have affected the banking industry.

Tighter financial conditions and a slowing economy forced banks to adopt a more defensive stance, by implementing liquidity measures that may lead to downward adjustments to net interest income.

Storm clouds are gathering over corporate earnings

Investor expectations regarding the earnings of Wall Street companies lowered during the first quarter to the level of -6,8%. Even at the end of December, the results of IQ 2023 were expected to be similar to previous results. If -6,8% is the real drop in this quarter, it will be the largest drop in earnings reported by the index since Q2020 31,8 (-XNUMX%).

The sentiment towards profitability in the first quarter is bearish. As of April 6, 106 companies with S & P 500 released its earnings forecast for the first quarter. Among these 106 companies 78 issued negative results forecast, and 28 issued a positive one.

The number of companies issuing negative forecasts is above the five-year average (57) and above the ten-year average (65).

The number of companies issuing a positive outlook is below the five-year average of 39 and below the ten-year average of 33.

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About the Author
Lukasz Klufczynski
Chief Analyst of InstaForex Polska, with the Forex market and CFD contracts since 2012. He gained his knowledge in many financial institutions, such as banks and brokerage houses. He conducts webinars in the field of technical and fundamental analysis, investment psychology and MT4/MT5 platform support. He is also the author of many expert articles and market commentaries. In his trading, he puts emphasis on fundamental elements, relying on technical analysis.