Q4 earnings reporting is officially underway, and it is off to a great start. The big banks kicked off the season as usual, and they immediately knocked it out of the park. JP Morgan, Citigroup, Bank of America, and Wells Fargo, as well as investment banks Goldman Sachs and Morgan Stanley, all reported better-than-expected results, with positive surprises encompassing nearly all divisions:
- On the lending side, net interest income was higher than expected, supported by a pick-up in loan origination and by the rise in long-term interest rates, and resulting yield curve steepening, that occurred during the quarter.
- On the trading front, banks benefited from the higher-than-normal market volatility that resulted from economic surprises and the presidential election, with several banks posting their largest ever quarterly trading haul.
- Investment banking fees also contributed to the positive quarter, as activity in the mergers & acquisitions (M&A) space is finally recovering from a multi-year slowdown caused by high interest rates.
- The results were also boosted by easy comps from a year ago, when banks were hit with a large special assessment fee from the FDIC.
Analysts came into this week with high expectations for the sector, forecasting a Q4 earnings growth rate of 39.5%, which would far outpace every other sector in the S&P 500 index (see first chart below). In light of the latest bank reports, and judging by Wednesday’s rally in the related stocks, it seems that analysts were perhaps a bit too cautious. Going forward, we think banks remain well positioned to outperform given a resilient economy, a steepening yield curve, a pick-up in M&A activity, and a friendlier regulatory environment.
Q4 2024 Expected Earnings Growth by Sector
Source: FactSet Research, as of 1/10/2025
Strong results from the banks also bode well for the broad corporate sector, given the linkages that these institutions have throughout the economy. For the S&P 500 index as a whole, analysts expect earnings growth of 11.7% for Q4 2024, which would be the highest growth rate since Q4 2021. And looking ahead, that growth rate is expected to remain in the low double digits during the first half of 2025, before accelerating into the 15-17% range in the back half of the year. If these numbers actually came to fruition, they would provide a very strong backdrop for the S&P 500 index as it progresses through the third year of this bull market. Over the next few weeks, we’ll get lots of reports from the rest of the corporate sector, which will give us a good feel for whether we are still on track to hit these targets.
S&P 500 Index Quarterly Earnings (Actual & Estimates)
Source: FactSet Research, as of 1/10/2025
Sauro Locatelli CFA, FRM®, SCR®
Director of Quantitative Research
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