April Outlook: Will Recent Industry Turmoil Keep Banks in Spotlight as Earnings Season Begins?

April Outlook: Will Recent Industry Turmoil Keep Banks in Spotlight as Earnings Season Begins?

Key Takeaways

    Q1 earnings season puts spotlight on banks in mid-April following recent turmoil.

    Is an ‘earnings recession’ underway? Analysts expect overall weakness in company reporting.

    Market likely to remain focused on Fed as possibility of rate pause builds.

Alex Coffey, Senior Trading Strategist, TD Ameritrade

With the latest rate hike out of the way and the first quarter wrapped up, investors will likely turn their attention to company financials by mid-April as earnings season looms.

Major U.S. banks always kick off earnings season, and the financials sector’s recent turmoil could make those results even more influential no matter how they turn out. After all, banking performance reflects the health of so many industries. By the end of April, airlines, info tech, health care, and communications services will join the spotlight as Q1 results pick up steam.

Unfortunately, there’s not much optimism for improved profits after a tough Q4 because analysts generally expect S&P 500® (SPX) earnings per share to sink again this time around. S&P 500 earnings are expected to drop 6.1% year over year in Q1, according to research firm FactSet. A second straight quarter of declining results would put us in what’s known as an “earnings recession.”

Flowers and earnings aren’t the only things taking bloom in April. The month also brings more focus on the global economy as investors dig into Q1 economic data from Europe and China, placing China’s reopening progress under scrutiny.

Pause button?

While the next Federal Reserve meeting isn’t until early May, there’s likely to be continued focus on speeches by Fed officials as investors try to get a handle on future rate hikes or the possibility of a pause after nine straight increases. Recent futures trading points to increasing likelihood of a May pause. Investors are likely to keep a close eye on the futures market for clues as the Fed’s May meeting approaches. Much could depend on jobs and inflation data coming our way in April, as well as the health of banks.

Volatility spiked in mid-March after two regional banks failed and uprooted the market. That turmoil eased a bit later in the month. Barring geopolitical issues or another bank failure, volatility could be a bit more subdued in the weeks ahead as investors digest piles of earnings data hitting their screens each day. Sometimes focusing on earnings instead of macro events helps keep a lid on such turbulence.

Bank earnings spotlight

Some earnings reports matter more than others. This particular quarter, investors may keep a closer eye on big banks like JPMorgan Chase (JPM), Goldman Sachs (GS), and Bank of America (BAC) when they begin the parade of banks reporting mid-month.

The financials sector was among the worst Q1 performers from a stock market basis, though regional banks came under the most pressure as investors sweated through two U.S. bank failures. The big banks could be under pressure in Q1 to show investors they have the wherewithal to weather any financial storms that might be gathering and to provide evidence that the “fortress” balance sheets they often emphasize are truly a big enough wall against the wind.

As always, it’ll be interesting to hear what the big bank executives have to say about the economy and banking industry health. Do they see signs of a pending recession, as many analysts do? Are they going to tighten their lending standards and make credit harder to get? How are their customers weathering higher interest rates? Will they set aside additional cash to protect from potential loan defaults?

All these questions and more are on the table. When the numbers arrive, keep a close eye on deposit trends and the quality of each bank’s credit portfolio. Given recent words like “bank run” in headlines, those data will likely be under more scrutiny than usual this time around. But major U.S. banks will probably demonstrate some protection from the recent turmoil as they’ve reportedly attracted deposits from customers fleeing smaller banks.

That could make results at regional banks trickier this time around. These banks are the lifeblood of many smaller U.S. states, cities, and communities, so their health can’t be overlooked. Recent worries about regional banks and possible credit tightening could have a major impact on sectors like commercial real estate and retail that rely on smaller banks for loans. Upward rate movements are another concern because loans already on the books with low rates will be up for renewal at likely higher rates in the future. 

So, keep studying regional banks after the majors report. Evaluate their earnings and note how their executives plan to handle that coming pressure. Companies like PNC Financial Services Group (PNC), Citizens Financial Group (CFG), and Fifth Third Bancorp (FITB) are among many regional banks worth tracking for these signs for the rest of the year.

April Outlook: Will Recent Industry Turmoil Keep Banks in Spotlight as Earnings Season Begins?

SPX RUNS BEHIND: The S&P 500 index (SPX—candlesticks) has had a relatively flat March, which is surprising considering all the mid-month turmoil around banks that briefly sent the market reeling. However, it’s been easily outpaced by the Nasdaq-100® (NDX—purple line), which is heavy on tech stocks and benefitted from falling Treasury yields. Data sources: S&P Dow Jones Indices, Nasdaq. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results. 

Cloud over tech?

Once banking earnings finish, eyes will move to the mega-cap tech sector ahead of expected April earnings reports from companies like Microsoft (MSFT), Alphabet (GOOGL), Intel (INTC), and others. Results from electric vehicle makers, highlighted by Tesla (TSLA), will also likely arrive in April.  

Recent tech earnings from companies like Nvidia (NVDA) and Cisco (CSCO) cheered tech investors after the sector had a rough start in 2023. January and February brought mostly disappointment from mega-cap stocks, including MSFT and Amazon (AMZN), hurt by slowing demand, especially in the cloud business. AMZN’s recent announcement of job cuts in its Amazon Web Services (AWS) cloud business didn’t exactly raise hopes for a cloud turnaround. Check earnings from AMZN, MSFT, and GOOGL for continued cloud pressure because cloud usage is often viewed as a good proxy for business spending.

Semiconductors are another area to watch. The recent strong showing by NVDA brought some optimism back to a sector hit by slowing demand and geopolitical tensions between the United States and China. INTC and Texas Instruments (TXN) are two major chip firms expected to report in April that could shed light on industry dynamics. Watch to see if INTC provides an update on efforts to reshore chip production from Asia back to the United States.

Don’t forget inflation

There will be things to watch in April besides earnings. Look to April 7’s March Nonfarm Payrolls report. The Labor Department’s February report showed a significant drop in jobs growth from January’s swollen levels, something the Fed likely appreciated as it struggles to tighten the labor market as a way to fight inflation.

In February, wage growth slowed too, so investors will want to know if the trend continued in March. Another trend to watch is workforce participation, a data point that inched up in February and is seen as a positive sign that higher wages were finally attracting folks back to the office. Ultimately, that could mean shrinking job openings and falling competition for workers, easing wage pressure on companies.

Also, the manufacturing industry has been contracting for months. Will this continue? Watch for the March Institute for Supply Management’s (ISM) Manufacturing Index on April 3.

Though banking concerns remained through late March, keep in mind that there’s a slight lull in data and earnings between the most recent Fed meeting and the start of earnings season in mid-April, something investors might want to consider. It can be kind of refreshing when you have market lulls in the middle of new information and data that forces market participants to think through what they already know and take a deeper look at recent developments.

Recent weeks have featured a firehose of earnings, data, and central bank decisions that have sparked jitters. There’s a growing sense that tougher times could be ahead, certainly supported by the recent massive repricing of debt as yields dive. Investors need time to consider how to react to the fallout of potential slower growth and tightening credit. Consider now a good time to review your portfolio, check your allocations, and see if you remain comfortable with your financial plans after all the recent excitement.

Happy trading,


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April Outlook: Will Recent Industry Turmoil Keep Banks in Spotlight as Earnings Season Begins?

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