Bank Earnings Among First Q4 Results As Profit Outlook Deteriorates

With JPMorgan Chase (JPM), Wells Fargo (WFC) and other major bank earnings due Friday, fourth-quarter earnings season sets off as Wall Street girds itself for the first decline in earnings in nine quarters.

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S&P 500 Q4 earnings are projected to fall 4.1%, according to FactSet. It would be the first decline since the third quarter of 2020, when the economy was feeling the effects of Covid lockdowns.

Analysts have been cutting profit expectations more than usual, says Senior Earnings Analyst John Butters. Overall estimates went down 6.5% during the fourth quarter, much more than the 2.5% average cut over the past five years or the 3.3% in the past 10 years.

S&P 500 earnings growth has been contracting, from a 9.4% increase in Q1 to 5.8% in Q2 and 2.5% in Q3. With higher interest rates and inflation squeezing consumers and businesses last year, most of 2022’s earnings growth occurred in the first half of the year, Butters said in a report.

Amid broadly lower expectations, several bank earnings reports are being released Friday before the stock market’s opening bell. Look for bank executives to offer some insights on the economy. Rising interest rates can help banks’ performance, but recession worries have weighed on the sector.

JPMorgan, Other Bank Earnings

The consensus earnings estimate for JPMorgan is $3.12 per share on revenue of $34.29 billion, according to FactSet. That would mean a 6% drop in EPS over the year-ago period, but a 17% rise in revenue.

JPMorgan stock is forming a flat base with a 138.76 buy point. A positive surprise in the report could send shares above the entry. But remember that the stock market correction means any stock purchase is saddled with extra risk.

With the stock trading around 137 Friday, investors could buy a call option expiring the same day of the earnings report and a 137 strike price for $3.35. That works out to 2.4% of the stock’s price, making it an attractive possibility under IBD’s earning options strategy (discussed below).

Other bank earnings Friday include Bank of America (BAC), which is expected to decrease its EPS by 3% to 79 cents a share. Revenue is seen rising 10% to $24.32 billion, according to FactSet. Wells Fargo’s earnings should fall 7.5% to $1.28 a share with revenue of $19.99 billion, down 4%.

BlackRock, UnitedHealth, Bed Bath & Beyond On Deck

Investment bank BlackRock (BLK) has one of the best charts among the financials. It is forming a flat base with tight price action and a buy point at 785.75. A call option expiring Jan. 13 with a 735 strike was quoted at 17.60 Friday afternoon, or 2.4% of the stock’s price at the time.

FactSet’s estimates are for EPS to fall nearly 25% to $7.86 and revenue of $4.255 billion, down 17%.

Also Friday, Dow component UnitedHealth Group (UNH) will post results. Analysts expect EPS of $5.18, up 15.5%. The stock slid below the 200-day moving average the past few days.

Besides bank earnings, Bed Bath & Beyond (BBBY) will report Tuesday before the open. No one is expecting good news after the retailer Thursday warned it may file for bankruptcy to stay afloat. The stock has sunk to below 2 a share.

On Wednesday, KBHome (KBH) is expected to announce earnings of $2.87 a share and sales of $1.985 billion. It could be an important report for the homebuilding industry, where several stocks are forming bases and at least a couple have tried to rise past buy points.

Options Trading Strategy

A basic options trading strategy around earnings — using call options — allows you to buy a stock at a predetermined price without taking a lot of risk. Here’s how the options trading strategy works and what a call option trade recently looked like for WBA stock.

First, identify top-rated stocks with a bullish chart. Some might be setting up in sound early-stage bases. Others might have already broken out and are getting support at their 10-week lines for the first time. And a few might be trading tightly near highs and refusing to give up much ground. Avoid extended stocks that are too far past proper entry points.

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In options trading, a call option is a bullish bet on a stock. Put options are bearish bets. One call option contract gives the holder the right to buy 100 shares of a stock at a specified price, known as the strike price.

Put options are for weak performers with bearish charts. The only difference is that an out-of-the-money strike price is just below the underlying stock price. A put option gives the holder the right to sell 100 shares of a stock at a specified price.

You earn profits when the stock falls below the strike price with a put option.

Check Strike Prices

Once you’ve identified an earnings setup for a call option, check strike prices with your online trading platform, or at cboe.com. Make sure the option is liquid, with a relatively-tight spread between the bid and ask.

Look for a strike price just above the underlying stock price (out of the money) and check the premium. Ideally, the premium should not exceed 4% of the underlying stock price at the time. In some cases, an in-the-money strike price is OK as long as the premium isn’t too expensive.

Choose an expiration date that fits your risk objective but keep in mind that time is money in the options market. Near-term expiration dates will have cheaper premiums than those further out. Buying time in the options market comes at a higher cost.

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This options trading strategy lets you capitalize on a bullish earnings report without taking too much risk. Risk is equal to the cost of the option. If the stock gaps down on earnings, the most you can lose is the amount paid for the contract.

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