It begins anew. The year 2016 is in the books, and now that we’ve had a short trading week to adjust to 2017, the fourth-quarter earnings season is about to kick into gear.
Better yet: Coming into focus is one of the most explosive sectors in the wake of Donald Trump’s presidential election victory: financials. Banks have surged amid the likelihood of the incoming administration tearing down regulations that financial companies say have muted profits. It might not be that great for consumers, but banks are pleased as punch.
These big bank stocks are reporting this week, and a couple other blue chips will come into focus.
[See: The 25 Best Blue-Chip Stocks to Buy for 2017.]
Bank of America Corp. Bank of America (ticker: BAC) will enter Friday morning’s release of its fourth-quarter earnings with lofty expectations. Revenues are expected to improve nearly 7 percent to $20.91 billion — in a year where the company is expected to grow revenues by less than 1 percent — on profits expected to improve by 41 percent to 38 cents per share.
But short of a massive disappointment, expect the Bank of America story to continue being driven by two broader narratives.
There’s the aforementioned Trump tailwind, of course. Treasury pick Steven Mnuchin, a former Goldman Sachs Group ( GS) partner, has already vowed to strip back Dodd-Frank, which he said was “way too complicated and cuts back lending.” But BAC should also get a push from December’s Federal Reserve interest rate hike, as well as the possibility of a trio of rate increases in 2017.
Bank of America is sitting on a huge hoard of $439 billion in non-interest-bearing deposits, which is a boon when rates rise because it can generate more revenue from lending out that money, but it doesn’t have to pay any additional money to accountholders. BAC in its last quarterly finding said a 100-basis-point increase in short-term interest rates would translate into an additional $3.1 billion in net income.
Regardless of Friday’s report, BAC stock is headed in the right direction.
Wells Fargo & Co. Wells Fargo ( WFC), on the other hand, will be scrutinized a bit more closely.
While Wells Fargo should also enjoy the fruits of deregulation under soon-to-be President Donald Trump, the company is trying to recover from a spate of scandals that was expected to dig into this quarter. While the company is expected to improve revenues by a little more than 4 percent, earnings are actually estimated to decline about 3 percent to $1 per share.
A refresher: Wells Fargo was slapped with an all-time high $185 million in fines in connection with 2 million accounts that were fraudulently opened in customers’ names, undercutting faith in what once was considered Wall Street’s squeakiest-clean Big Four bank.
That has funneled down to issues with its retail banking business, which saw new checking account openings plunge 41 percent year-over-year in the scandal’s wake.
And while higher rates could be a boon for the likes of Bank of America, they could punish Wells Fargo, which has a significant traditional lending business that’s reliant on mortgages. Mortgage applications were off 12 percent on a seasonally adjusted basis from the previous two-week period. Piper Jaffray’s Kevin Barker says not to dismiss the drop just because it came during the holiday season.
WFC could have a much tougher row to hoe in coming months.
JPMorgan Chase & Co. JPMorgan ( JPM) is in a more similar boat as Bank of America in that it should benefit from both more lax regulations and higher interest rates, though JPM’s upside potential could be muted as it heads into Friday’s earnings report.
Wall Street has set a low bar on the top line for JPM, with analysts expecting revenue growth of just less than 1 percent to $23.95 billion. Profits are targeted to climb by a bit more than 8 percent.
[See: The 7 Best Bank Stocks to Buy in 2017.]
However, there are a couple of potential land mines to watch out for.
One is the Chase Sapphire card, which made headlines for its popularity despite a $450 annual fee, thanks to an uber-generous rewards program. Chase just announced it would be cutting the bonus points on Sapphire in half — an indication that the benefits might have been costly enough to hurt JPM.
Also, JPM’s 26 percent run over the past three months has jacked up the valuation on the bank to 37 percent more than book value, while BAC and Citigroup ( C), among others, still trade at less than book. Meanwhile, the yield has been driven down to 2.2 percent at a time Treasurys will be offering a little more income. Not an ideal situation.
Delta Air Lines. Delta ( DAL) is looking to build off the momentum from its 25 percent run in the fourth quarter of 2016 with its fourth-quarter report on Thursday morning.
The broader picture doesn’t look grand — Delta’s revenues are expected to recede by 1.6 percent, and profits are seen plunging by 30 percent. However, DAL has been dropping hints that the fourth quarter might not be as poor as expected.
In December, the airline said it believes a two-year decline in unit revenue will end early this year. It expects fourth-quarter passenger unit revenue to drop just 3 percent, versus prior expectations of a decline of 3 to 5 percent. The metric is then expected to improve to break even for the first quarter of 2017.
According to Delta President Glen Hauenstein, business travel volumes “picked up significantly” following the election. “It’s almost like the country breathed a sigh of relief,” he said.
Thus, while the top and bottom lines might not impress, Delta still has a good chance of pleasing Wall Street this week.
Apple. Lastly, Apple ( AAPL) will be celebrating the 10th birthday of the iPhone Monday at something of a crossroads. On the one hand, iPhone sales are on the decline, leading to the company’s first decline in overall revenues since 2001. CEO Tim Cook actually took a pay cut for the year because the company missed its sales targets. The latest iteration of the iPhone — the iPhone 7, and its sister, the iPhone 7 Plus — has already seen interest wane, leading Apple to cut back on production.
But the lackluster demand could be in part because of anticipation of the iPhone 8, which is expected to be a major design overhaul that strips the phone of its home button and features a glass body, among other changes.
[Read: Apple Desperately Needs a New Brilliant Product.]
Numerous analysts believe the iPhone 8 will set sales records for Apple — and that, in turn, could make 2017 the year that Apple stock finally reclaims the growth potential investors have been clamoring for over the past few years.
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3 Big Bank Stocks Are in Wall Street’s Spotlight This Week originally appeared on usnews.com
