- It’s been a mixed bag for Wall Street this earning season, with some banks beating estimates and some notching major misses
- Some themes across the board include a massive slowdown in investment banking revenues, as M&A and IPO activity plunged during a volatile year
- The net interest margin has helped keep numbers up for some, as rising interest rates improved the position between the interest being paid out to savers, and collected from mortgages and other debts
The holiday season is over and the earnings season has begun. And with 2022 giving us a year to forget when it comes to the stock market, investors will be looking to these results hoping for a positive start to the new year.
With that said, it’s important to keep in mind this reporting season relates to Q4 of 2022, October through December, so manage your expectations accordingly. Over the last couple of days, both Goldman Sachs and Morgan Stanley have missed their earnings estimates, though some banks have performed better.
The figures are being released against a backdrop of generally pretty pessimistic guidance from executives. Most Q3 earnings calls included forward expectations that were definitely not all sunshine and rainbows.
Over the past few days we’ve seen many of the big banks announce their figures, and it’s a bit of a mixed bag. While Wall Street definitely wasn’t immune to the volatility of the broader market, some banks such as Morgan Stanley and Goldman Sachs managed to finish the year in the green.
So what are the latest results and what does it mean for investors?
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Goldman Sachs records big earnings miss
Well it wasn’t a good quarter for Goldman. The Wall Street heavyweight has recorded their biggest earnings miss since October 2011, according to data from Refinitiv.
It was the fifth quarter in a row where the bank has recorded falling profits, and there have already been significant layoffs and reductions in spending and bonuses as a result. Net income in Q4 came in at $1.3 billion, which is way off the estimates of $2.2 billion.
It’s also significantly behind the figure from this time last year, which hit $3.9 billion.
They’ve had ambitious plans to expand into consumer banking, and so far it’s proving a harder nut to crack than they probably expected.
“I think we now have a very good deposits business,” Solomon said. “We’re working on our cards platform, and I think the partnership with Apple is going to pay meaningful dividends for the firm.”
The stock price took an 8% hit on the news.
Morgan Stanley beats estimates with $2.2 billion quarter
Morgan Stanley, on the other hand, had a much better Q4. They managed to bring in revenue of $2.2 billion, close to a billion dollars more than rivals Goldman Sachs.
The bank has been supported by its strong wealth management and investment management divisions, with wealth management in particular recording it’s best ever result.
It wasn’t all good news, however, with investment banking revenue falling by over 50%. This comes off a year that saw very little in the way of merger and acquisition activity and public listings.
Chief executive James Gorman was happy with the results, stating that, “It’s fair to say our business model was tested this year. We focus on markets we know best.”
Investors were pleased with the results, with Morgan Stanley stock gaining 6% after the announcement.
JPMorgan Chase beats earnings expectations by over 16%
JPMorgan Chase suffered a sizable earnings miss as well, coming in at $3.57 earnings per share against the $3.07 which had been expected according to Refinitiv.
The top line revenue figure hit $35.57 bill against the projected figure of $34.3 billion, despite adding a $2.3 billion provision for credit losses for the quarter. This provision is almost 50% higher than the number from Q3.
According to chief financial officer Jeremy Barnum, a recession is now expected, stating that there had been a, “modest deterioration in the Firm’s macroeconomic outlook, now reflecting a mild recession in the central case.”
The market’s response to the result was muted, with the stock price gaining 1%.
Wells Fargo gets smashed in Q4
Dear oh dear. Q4 was not kind to Wells Fargo, who suffered significant downgrades across the board. Profits were down 50% compared to Q3, plus an additional $3 billion in costs from the fallout of the fake accounts scandal.
Their profit figures bring earnings per share down to $0.67, compared to $1.38 just 12 months before. Their provision for credit losses also jumped, hitting $957 million against $452 million provision a year ago.
It’s no surprise that the bank is looking to shake things up, with recent announcements that they will be making significant changes to their mortgage offering. Once aiming to reach as many Americans as possible, Wells Fargo is now only offering mortgages to existing banking clients, plus a focus on minority communities.
Unsurprisingly, the stock took a 4% hit on the news.
Citi notches slight earnings miss to round out 2022
Citi was another bank hit hard by the slowdown in investment banking last year. Not only that, but dealing with a major restructure means they’ve felt the impacts even more than some of their rivals.
The total fall in revenue for that division was $645 million, significantly lower than the $722 million analyst had projected, and down 58% compared to the year before.
Net income for the company was $2.5 billion in Q4, down heavily from $3.2 billion from the year before but in line with analysts estimates.
One positive was the increase in net interest income, which increased by 23% compared to a year earlier.
Bank of America finishes the year with a solid Q4 earnings beat
It was a more positive story from Bank of America, who has been a major beneficiary of the Fed’s interest rate policy, securing sizable increases in profits due to the rising net interest margin.
The net interest margin is the difference between the interest rate paid out to savers and taken from those with debts with the bank. With rates at all time lows, there’s less room to add margin, and as they rise there’s more leeway.
Overall net interest increased by 29% in Q4, taking the total figure to $14.7 billion.
Total revenue came in at $24.5 billion, compared to analyst estimates of $24.2 billion. Not only that, but it was also 11% higher than this time last year.
Earnings per share were also ahead of estimates, coming in at $0.85 against expectations fo $0.77.
What does this mean for investors?
For the last decade or more, growth stocks like the tech sector have been where the most money has been made. Low interest rates has meant money has been cheap, allowing firms to borrow for expansion at a historically cheap cost.
Now that’s changing.
Some analysts could see value picks, like bank stocks, being the better place to be in the coming years, while others say that tech and other growth stocks are going to come roaring back.
This type of investing is known as thematic or factor investing. It involves investing according to which types of stocks are likely to perform best in the current environment. Honestly, it’s a complex strategy that’s difficult to get right.
Unless you have AI on your side.
We’ve created an Investment Kit (what we call our portfolios) called the Smarter Beta Kit, which uses factor based ETFs to gain exposure to these different investment themes. Some of the ETFs are focused on various factors like growth, value, momentum and others.
The best part is that every week our AI predicts how these are likely to perform for the coming week on a risk adjusted basis, and then automatically rebalances the Kit accordingly.
It’s like having your own Wall Street hedge fund manager, right in your pocket.
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