Most major U.S. banks are set to report their second-quarter earnings next week. In this Industry Focus: Financials clip, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss the key things investors should be watching for.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on July 8, 2019.
Jason Moser: Let's jump over to earnings. You brought up bank earnings, and we've got Earningspalooza getting ready to start up again. This is always a fun time for stock nerds like us because it gives us something to do, something to read, something to talk about. It's always interesting to find out what's going on under the hood, so to speak. We look at some of the data that comes out. FactSet Data shows that third-quarter S&P 500 earnings are forecast to actually show a decline now versus a modest gain not all that long ago. We talk on this show a lot about the bank earnings and how banks had been working in somewhat of a challenging environment with these low interest rates. It just hasn't given them a lot of wiggle room in regard to profitability. It doesn't seem like that is going to be getting any easier anytime soon. What's your headline here as we go into earnings season, for the banks in particular?
Matt Frankel: First of all, the banks are not going to be part of that earnings decline that you're talking about. Not the big banks anyway, for the most part. The point to remember with the banks is that they've been buying back stock hand over fist over the past year. If you buy back, say, 10% of your outstanding shares, and your earnings per share jumps up by 10% as a result, you didn't earn any more money. Buybacks are very distortive of bank earnings.
Moser: We call that putting lipstick on a pig, Matt. Is that too harsh?
Frankel: I've heard that expression. Citigroup is the first one to report on Monday. They're expected to report a nice earnings gain. I want to say that the consensus is for about 18% year over year. But the majority of that is going to be due just to buybacks. So, with the banks, the thing to keep in mind is, when it comes to the actual headline number and how it compares with the year before, take that with a big grain of salt.
The thing I would pay most attention to is how interest rate dynamics and any economic headwinds are affecting the bank's profitability. For example, as the Fed has been raising rates over the past couple years, we've seen interest margins expand for the most part at these big banks. That's a great side effect of rising rates. The Fed hasn't cut rates yet, but the market's expecting them to. So, we want to see if that's factoring into anything at all, if they say anything about it during their conference calls.
The other thing is any economic headwinds. Are loan volumes picking up or slowing down? Swelling loan volumes, especially when it comes to credit cards and things like that, can be a really good indicator that consumer confidence is starting to tick downward a little bit. It's always important to read between the lines when it comes to earnings, but with banks, because of the massive buybacks, it's really important this time to read between the lines and see how the major indicators are playing out.
Moser: Yeah. I think we're going to hear a lot of the rhetoric starting to pick up here as we inch closer to 2020. It is obviously a very big election season. It's going to be very, very interesting to see all of these forces at play here. It certainly seems like everybody's on a different page.
Frankel: Definitely. I would definitely keep an eye on what's going on in these banks all next week. We're lucky in the banking sector because we get to see the first glance of how everything's doing this quarter. You have Citigroup kicking things off on Monday. Tuesday, you've got JPMorgan, Wells Fargo, Goldman Sachs. Wednesday, Bank of America and U.S. Bank. Thursday, Morgan Stanley, Capital One, BB&T. Theirs will be interesting because of the merger coming up. And Friday, you have American Express and Regions, just to name the big ones. And that's all next week. We will be glued to our televisions and news feeds next week, I can tell you that much.
Moser: Oh, for sure. Yeah, we'll have a lot to talk about on this show for the coming month. Keep your Slack channel open, because I'm sure we'll be kicking around some ideas.