Earning season in focus

Once again at this time of the year earning seasons is on investors’ radar. For those that are not well accustomed, earnings season is when a large number of publicly traded companies start reporting their quarterly earnings.  Usually, each earnings season begins one or two weeks after the last month of each quarter, being March, June, September and December

The information and data shared during earnings seasons can offer specific details about a company, in addition to trends in various industries, and more broadly on the pace of economic sanity. The data released is ultimately compared with estimates to determine how a company performed against what the consensus pool of analysts was predicting.

Second-quarter earnings season gets underway in the week ahead. The banking sector kicks-off with the likes of JPMorgan Chase and Goldman Sachs today, Bank of America, Citigroup, and Wells Fargo reporting tomorrow, and Morgan Stanley and Truist reporting on Thursday. The banking sector has its weighting in a reporting season, as it sheds light on the economy’s current state, especially at this juncture following a tough 2020 and a yet uncertain 2021 due to a variety of factors.

In Q1-2021, global banks surpassed analysts’ projections with strong results and profitability across all regions – Return on Equity (RoE) of US banks was reported at 17% (actual) vs 11.5% (projected) while European banks posted a return of 8.5% (actual) vs 5.6% (projected). The latter clearly uncovers the divergence between the two economies with Europe relatively remains a weak bay for investors.

Amid an improving economy, most European and US banks exceeded analysts’ expectations during Q1-2021, namely through higher revenues from trading activities, rising bond yields and lower loan loss provisions, when compared to the same comparable period in 2020. However, moving forward the crux of it all is whether this positive pace will be maintained for the remainder of 2021.

Undoubtedly, at this juncture focus will remain on loan loss provision levels. As economies continue their struggles towards recovery, moving forward it would be interesting to see what will actually happen when governments and bank support schemes, which during the unprecedented scenario bridged the much needed short-term liquidity, will commence tightening their belt. More specifically, in line with the upcoming earnings season it would be interesting to focus on how credit loss provision levels will fluctuate, as banks will commence their normalisation path, while fiscal and monetary politicians look in repositioning themselves.  

Apart from the big banks, other notable companies such as PepsiCo, ConAgra and Delta are set to report this week. In the latter’s case, it would be interesting to see the pace of passenger movements and the prospects going forward as the U.S. economy continues its reopening. In parallel, this will give more visibility on the consumer discretionary space and how consumers are behaving following the imposed restrictive measures.

The earnings season starting in July 2021 comes more than a year following the COVID-19 pandemic outbreak. Investors are looking forward to a strong earnings season when compared to the depressed numbers reported in quarter two 2020. The base effect proposition remains the more applauded scenario. However, as mass vaccine rollouts continue in many countries, some of the more disrupted stocks may rally, as possible upcoming surprises should not be under estimated. On the contrary, those that benefitted during the pandemic may see more subdued growth in comparison to Q2 last year.

Nevertheless, moving forward, close monitoring is imperative, namely in relation to specific pandemic related events. The delta variants continue to pose undeniable risks and their unpredictability will going forward condition the pace of economic recovery. Thus cautious might be the best course of action. Nonetheless, any events that trigger volatility should be considered as an opportunity to dip-in in solid names that offer upside potential in the medium to long term.  

This article was issued by Andrew Fenech, Research Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.