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Zacks Earnings Trends Highlights: J.P. Morgan, Bank of America and Citigroup

CHICAGO, April 17, 2014 /PRNewswire/ -- Zacks Director of Research Sheraz Mian says, "The market has likely moved past the Q1 numbers and is looking ahead to the coming periods when earnings growth is expected to accelerate."

Zacks Investment Research, Inc., www.zacks.com

Q1 Earnings Season Off to a Weak Start

The 2014 Q1 earnings season has gotten off to a relatively soft start. Low expectations essentially guarantee that we are unlikely to get any major negative surprises. But as with economic data, the market has likely moved past the Q1 numbers and is looking ahead to the coming periods when earnings growth is expected to accelerate.

A big part of the reports thus far have been from the Finance sector, with results from more than one-third the sector's total market capitalization are already out. Most of the Finance sector results have been from the major banks, which alone account for more than 40% of the Finance sector's total earnings.

Estimates for bank earnings had fallen ahead of the start of the earnings season as it became clear that weakness in the capital markets business will compound the existing mortgage banking woes. The capital markets business, particularly on the fixed income side has been weak for a while and we will likely see a continuation of that trend in Q1, with fixed income revenues offsetting gains on the advisory sides. We saw this with J.P. Morgan (NYSE:JPM-Free Report), Bank of America (NYSE:BAC-Free Report) and even Citigroup's (NYSE:C-Free Report) otherwise better-looking report couldn't hide this issue. The ever present legal/compliance costs also don't seem to be going away either and have effectively become a recurring part of the business model.

The weak results at Bank of America are a big reason for the Q1 earnings decline for the Major Banks industry. But even excluding the company, the industry's Q1 results are weaker than what we have been seeing in recent quarters. Even the beat ratios, both earnings as well as revenues, are weaker than in other recent quarters.

Overall Q1 expectations remain low, with total earnings for the S&P 500 expected to be down -4.0% from the same period last year on +1.3% higher revenues and modestly lower margins. As has been the trend for more than a year now, estimates for Q1 came down sharply as the quarter unfolded. The current -4.0% decline in total Q1 earnings is down from +2.1% growth expected at the start of the quarter in January.

With two-thirds of S&P 500 members typically beating earnings estimates in any reporting cycle, actual Q1 results will almost certainly be better than these pre-season expectations. But Q1 is unlikely to repeat the performance of the last few quarters when we would witness new all-time records for total earnings each quarter.

Guidance has been overwhelmingly weak for more than a year now, keeping the revisions trend firmly in the negative direction. Odds are that we wouldn't see any change on that front this earnings season either, bringing down estimates for the rest of the year. Investors haven't cared about negative estimate revisions thus far, but it will be interesting that behavior will remain in place going forward as well.

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