Implied Expectations Are For 20.1% Earnings Growth In Q1

Bank Of America Reports Similar Results

On Monday morning, Bank of America reported earnings. This is the last of the big 4 banks to report. The results were similar to the others as earnings beat estimates. Because the stock fell in sympathy with the other results on Friday, it rallied on Monday along with the overall market. The rally probably wasn’t caused by earnings because the stock was down in the morning and didn’t react to the results in pre-market trading. The stock is up 31% in the past year as it did well from September to January.

The firm’s Q1 EPS was 62 cents which beat estimates for 59 cents. Revenue was $23.1 billion versus the estimates for $23.059 billion. Net interest income was $11.6 billion versus the $11.69 billion forecast. Like the other major banks fixed income trading was weak as its revenue was down 13% to $2.5 billion which missed estimates for $2.92 billion. Just like the other banks equities trading was up big because of the volatility. Revenue was $1.5 billion which was a 38% increase. Consumer banking revenue was up 9% to $9 billion as net interest income in this division was up 13%. The firm’s forward PE is 11.7 which is in line with the other banks. The sector looks like it can do well in the next few months with JP Morgan being the leader and Wells Fargo being the laggard.

First Taste Of Q1 Earnings

Earnings season started last week as FactSet’s latest numbers include the results from 6% of firms in the S&P 500. The expectation is for 17.1% earnings growth. Including the average beat rate, the implied expectation is for 20.1% growth. It’s extremely difficult to see a bear market with such high growth. Generally, this level of growth occurs after recessions as comparisons are easy. The last time growth was this high was the 34% increase in Q3 2010. Stocks don’t have the upside they had in 2010 as they were cheaper then, but downside is unlikely.

The table below is interesting as it shows stocks have only increased 2.6% per year when year over year earnings growth was greater than 20%. I don’t think this means stocks will be weak in 2018. It depends on expectations. Since the average beat is implying 20.1% growth, I doubt investors will be disappointed with above 20% growth. If the expectations were higher, I could see a scenario where stocks are weak with above 20% growth.