US banks earnings preview: 3 key themes to watch
Q4 earnings season kicks off in earnest later this week, with major banks like JPMorgan Chase, Citigroup, Goldman Sachs, and Morgan Stanley all scheduled to report their results by the middle of next week...
Share this:
Here we go again!
Q4 earnings season kicks off in earnest later this week, with major banks like JPMorgan Chase, Citigroup, Goldman Sachs, and Morgan Stanley all scheduled to report their results by the middle of next week. We’ll have individual previews for each of these names throughout the week, but we wanted to start with a broad overview of the financial sector and highlight some of the key themes that are driving the industry as a whole:
1) Yield curve flattening
“Borrow short and lend long” has been a basic tenet of banking for centuries, referring to the fact that banks tend to borrow money over short-term periods through savings accounts and lend money over longer-term periods in the form of mortgages and business loans. Due to this dynamic, the yield curve, or the spread between short-term and longer-term interest rates, is a critical variable driving bank’s profits.
Over the last quarter of 2021, this spread compressed relatively sharply. Using the 10yr-2yr treasury yield spread as a proxy, the yield curve flattened by about 40bps in Q4, with the interest rate premium for 10-year debt over 2-year debt falling from 1.20% to 0.80%. In other words, the difference between traditional lending banks’ revenue and expenses shrunk, presenting a potential headwind for US bank earnings this quarter.
2) Investment banking and trading
Whereas the flattening yield curve could hurt bank profits this quarter, investment- and trading-focused banks could see a considerable tailwind from the ongoing buoyancy in equity markets. Between a record year for IPOs, still low interest rates, and significant volatility in financial markets, trading and investment banking profits at major banks should be strong. Expectations are particularly high for investment-focused banks like Goldman Sachs and Morgan Stanley, though more traditional borrowing-and-lending institutions like Wells Fargo may not benefit as much from these trends.
3) Relative stock performance
Q4 was also interesting for the performance of major financial company stocks. The financial sector ETF XLF underperformed the S&P 500 by nearly 6% through Q4, due at least partially to the aforementioned flattening of the yield curve. That said, the financial sector has gotten off to a roaring start to 2022, more than reversing its Q4 losses and approaching its highest level relative to the broader market since the onset of the COVID pandemic. The results we see in the coming week and a half will go a long way toward determining if the recent burst of outperformance will continue or whether the financial sector will start to underperform the broader market again.
Source: TradingView, StoneX
Stay tuned throughout the week for our updates on the most important individual banks to watch this quarter!
How to trade with FOREX.com
Follow these easy steps to start trading with FOREX.com today:
- Open a Forex.com account, or log-in if you’re already a customer.
- Search for the market you want to trade in our award-winning platform.
- Choose your position and size, and your stop and limit levels.
- Place the trade.
Here we go again!
Q4 earnings season kicks off in earnest later this week, with major banks like JPMorgan Chase, Citigroup, Goldman Sachs, and Morgan Stanley all scheduled to report their results by the middle of next week. We’ll have individual previews for each of these names throughout the week, but we wanted to start with a broad overview of the financial sector and highlight some of the key themes that are driving the industry as a whole:
1) Yield curve flattening
“Borrow short and lend long” has been a basic tenet of banking for centuries, referring to the fact that banks tend to borrow money over short-term periods through savings accounts and lend money over longer-term periods in the form of mortgages and business loans. Due to this dynamic, the yield curve, or the spread between short-term and longer-term interest rates, is a critical variable driving bank’s profits.
Over the last quarter of 2021, this spread compressed relatively sharply. Using the 10yr-2yr treasury yield spread as a proxy, the yield curve flattened by about 40bps in Q4, with the interest rate premium for 10-year debt over 2-year debt falling from 1.20% to 0.80%. In other words, the difference between traditional lending banks’ revenue and expenses shrunk, presenting a potential headwind for US bank earnings this quarter.
2) Investment banking and trading
Whereas the flattening yield curve could hurt bank profits this quarter, investment- and trading-focused banks could see a considerable tailwind from the ongoing buoyancy in equity markets. Between a record year for IPOs, still low interest rates, and significant volatility in financial markets, trading and investment banking profits at major banks should be strong. Expectations are particularly high for investment-focused banks like Goldman Sachs and Morgan Stanley, though more traditional borrowing-and-lending institutions like Wells Fargo may not benefit as much from these trends.
3) Relative stock performance
Q4 was also interesting for the performance of major financial company stocks. The financial sector ETF XLF underperformed the S&P 500 by nearly 6% through Q4, due at least partially to the aforementioned flattening of the yield curve. That said, the financial sector has gotten off to a roaring start to 2022, more than reversing its Q4 losses and approaching its highest level relative to the broader market since the onset of the COVID pandemic. The results we see in the coming week and a half will go a long way toward determining if the recent burst of outperformance will continue or whether the financial sector will start to underperform the broader market again.
Source: TradingView, StoneX
Stay tuned throughout the week for our updates on the most important individual banks to watch this quarter!
How to trade with City Index
You can trade with City Index by following these four easy steps:
- Open an account, or log in if you’re already a customer
• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
- Search for the company you want to trade in our award-winning platform
- Choose your position and size, and your stop and limit levels
- Place the trade
Open an account in minutes
Experience award-winning platforms with fast and secure execution, and enjoy tight spreads from 0.5 pts on FX and 0.3 pts on indices.
Economic calendar
Web Trader platform
Our sophisticated web-based platform is packed with features.
Related articles
USD/MXN Analysis: Can the Peso Recover Against a More Aggressive Fed?
Although the Mexican peso is attempting to regain some ground during today's session, price action throughout the week shows a gain of more than 1.00% in USD/MXN, highlighting buying momentum that continues to favor the U.S. dollar.
US Treasury yields surge as Fed and oil pressure bonds
Fed pricing has turned more hawkish, oil has surged and Treasury yields have backed up hard. Here’s how the pieces fit together.
FOMC Meeting Preview: Three Questions for Chairman Warsh
Assuming the Fed delivers the expected hike, traders will want to know WHAT could prompt another hike, WHY they hiked this time, and HOW to interpret the dot plot.
This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.
StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.
In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.
StoneX Financial Pte. Ltd. is not under any obligation to update this report.
Trading CFDs carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.forex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.