Will Earnings Keep the Bull Market Roaring?

Wall Street showed its resiliency once again on Monday. After opening the trading session weaker, the major market benchmarks finished it with solid gains, and the S&P 500 (^GSPC 0.87%) and Nasdaq Composite (^IXIC 1.11%) hit all-time records again. The Dow Jones Industrial Average (^DJI 0.67%) fell just short of topping the 35,000 mark.

Data source: Yahoo! Finance.

On any given trading day, there are almost always at least a few companies reporting their latest financial results, but the number of earnings releases always starts to build around the second week of the quarter. Later this week, banks and airlines will begin releasing their latest quarterly figures. You can bet that investors around the world will be watching those reports closely for signs that the U.S. stock market can maintain its upward momentum in the second half of 2021.

Banking on a strong future

Bank stocks will dominate the beginning of earnings season this week. Goldman Sachs (GS 3.30%) and JPMorgan Chase (JPM 1.94%) start things off Tuesday morning, while Bank of America (BAC 2.06%), Citigroup (C 3.06%), and Wells Fargo (WFC 1.24%) deliver their results Wednesday. Morgan Stanley (MS 1.58%) and U.S. Bancorp (USB 1.48%) are among the financial institutions reporting on Thursday.

Most banks will post much better bottom-line numbers than they did last year. For instance, analysts expect to see JPMorgan more than doubling its year-ago earnings per share, while Goldman's quarterly earnings should return to near their pre-pandemic norms after almost entirely disappearing in the second quarter of 2020. The biggest driver of those gains is that banks are not reserving funds against potential loan losses right now as they were this time last year, and many institutions are even feeling comfortable enough to release some of their reserves, which will bolster their results even further.

Investors want to see banks share the wealth, and many have already revealed their plans to return capital to shareholders through combinations of higher dividends and more extensive stock repurchases. Yet interest rates have recently moved lower after a prolonged upward trend throughout the first part of 2021, and that has some bank investors less excited about the future. If banks can't convince shareholders they can get through an even more prolonged period of narrower net interest margins, then the gains they've seen so far in 2021 could evaporate -- and that would take away a key underpinning of this year's bull market.

Image source: Delta Air Lines.

Learning to fly?

Meanwhile, airline investors will get a sneak peek at how earnings season might go when Delta Air Lines (DAL 3.05%) announces its results on Wednesday. Other airlines aren't expected to share their numbers until next week.

The turnaround story for Delta won't be nearly as quick as it will for big banks. The Atlanta-based airline will almost certainly report that it lost money in the second quarter, albeit at a much slower pace than it did a year ago. Those following the stock don't expect Delta will return to profitability until 2022 at the earliest, even as revenue soars compared to last year, when the pandemic caused air travel to all but disappear in the spring.

Investors will be watching a number of factors, including the impact of the Delta variant on domestic and international travel, capacity and labor issues, aircraft orders and purchases, and fuel-related costs. Airline stocks have pulled back from their highs of a few months ago, but their direction from here will depend heavily on whether they can keep up their momentum or whether resurgences of COVID-19 lead to further problems for the companies.