We’re now within 48 hours of Q4 earnings reports from some of the top financial institutions in the country.
On Friday, JPMorgan Chase (JPM) will lead a busy calendar of companies that will set the tone with financial outlooks for 2023. As always, I have my eyes on Jamie Dimon, the Chairman and CEO of the largest bank by asset holdings – JPM.
Will he smile at the numbers? Or will he cover his face in abject terror?
These are important questions for the coming week. Today, I want to break down the five most important questions for earnings as we head into Friday.
Question 1: Are Banks Bracing for a Recession or Not
If we want insight into where the U.S. economy is heading, the banks will give us the first clue. The broad assumption is that higher interest rates – pushing above 4% for the first time in most of my adult lifetime – would benefit banks in their bread-and-butter lending practices. But there’s an important term you must know this week: “Loan Loss Provisions.”
The big banks might benefit from last year’s uptick in fixed-income trading. However, earnings have actually dipped to do their loan loss provisions. These are cash reserves that the bank must set aside to cover any loans that are at high risk of default.
The math is pretty simple: If the banks think that consumers and businesses can’t repay their loans, these provisions will be higher. Right now, delinquencies are low – and that’s really positive for the community banking space. Let’s see how the forecasts change.
Question 2: What Is Happening with Airlines?
The banks will dominate the schedule on Friday. But Delta Airlines (DAL) will also report. And maybe we can get to the bottom of what the hell is happening with the U.S. air traffic.
On Wednesday, all air traffic was grounded for several hours over Florida. The media called it a “sweeping outage.” We still have no clue what’s happening, as Transportation Secretary Pete Buttigieg is in charge.
There are fundamental issues with our transportation system that need to be addressed, and the U.S. government nearly doubled its infrastructure spend for airlines in recent years.
What exactly is going on? And does Delta have any answers? This is our best airline by a mile. Maybe they can tell us what they expect from the growth and expansion of our air traffic in the years to come.
Question 3: What Sort of Earnings Compression Can We Expect?
As I’ve stated, I expect that companies will project economic weakness in 2023. The U.S. consumer is still spending, but that feels more a direct result of negative real interest rates (CPI minus Fed Funds rate) pulling consumption forward.
The key figure for U.S. manufacturing activity is the NFIB Small Business Leading Indicator. And it’s turning negative once again…
U.S. manufacturing numbers were terrible last week. But markets are still stuck in “inflation mode.” At some point, the focus must center on the fundamentals. And it’s clear that the U.S. economy is slowing down.
That said, the Federal Reserve isn’t just raising interest rates in February. It will also be cutting its balance sheet. The Fed cut its balance sheet by more than $43 billion last week alone.
Given the direct relationship between the S&P 500 and the Fed’s balance sheet, I expect natural earnings compression from that trend alone. The question is how weaker business outlooks will weigh on earnings valuations too.
To your wealth,
P.S. Please let me know if you have any feedback, questions about today’s issue or anything else. Just email us at email@example.com.
*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
Market Momentum is Green
Our latest addition to Tactical Wealth Investor popped another 1.5% today, and the stock is really looking strong. We have been in positive momentum conditions since Friday, January 6 at 11:45 am. Our latest pick offers a stock at 18% less its liquidation value and pays a handsome 7.2% in yield. More important, I love that our energy play around long-term oil prices is now offering an 11.3% dividend and has an upside of 40% in 2024. Check it out.