UNH - Wall Street Lunch: Banks Kick Off Earnings Season

2024-01-12 14:09:00 ET

Summary

• JPMorgan Chase and Citigroup post solid results, while Wells Fargo and Bank of America see declines.
• The producer price index eases inflationary worries, increasing pressure on policymakers to ease soon.
• Goldman Sachs recommends buying calls on Target, Apple, State Street, and Waste Management ahead of earnings.

Listen below or on the go on Apple Podcasts and Spotify

J.P. Morgan and Citi post solid results. (0:15) Bond yields slide after cool PPI . (2:37) Goldman has 25 options trades ahead of earnings. (6:19)

The following is an abridged transcript:

Our top story today so far

Welcome to earnings season. A raft of results from major bank started things in earnest this morning.

The market liked what it heard from JPMorgan Chase ( JPM ) and Citi (C), but was less impressed with numbers from Wells Fargo (WF C) and Bank of America (BAC).

JPMorgan, the country’s largest bank, said it expects 2024 net interest income, excluding its Markets business, to stay at about the same level it was in 2023 as it expects loan growth to partly offset lower interest rates.

The bank expects full-year net interest income of ~$90 billion, or ~$88 billion excluding Markets, compared with the $86.4 billion forecast compiled by Visible Alpha consensus and $89.3 billion in 2023.

Citigroup said it expects 2024 revenue to increase to about $80-$81 billion from $78.5 billion in 2023, driven by gains in Treasury and trade solutions, securities services, a rebound in investment banking and wealth, and lower partner payments in retail services.

CEO Jane Fraser says: "Given how far we are down the path of our simplification and divestitures, 2024 will be a turning point as we'll be able to completely focus on the performance of our five businesses and our transformation."

Wells Fargo's bottom line was impacted by the FDIC's special assessment on big banks to replenish its insurance fund after last March's regional bank turbulence. A charge for planned staff cuts also hit profit.

For 2024, the bank said net interest income could be about 7%-9% lower than 2023's $52.4 billion level on lower interest rates, an expected decline in average loans and further attrition in Consumer Banking and Lending deposits.

Bank of America posted stronger-than-expected adjusted Q4 earnings, but saw net interest income match consensus and noninterest income fall short of Wall Street expectations.

Net interest income of $14.1 billion, matching the Visible Alpha consensus, fell from $14.5 billion in the prior quarter and $14.8 billion a year ago, as higher deposit costs and lower deposit balances more than offset higher asset yields.

In today’s trading

Following a slightly hot consumer price index, the December producer price index eased some inflationary worries.

The PPI edged down 0.1% on the month, compared with the 0.1% increase economists expected. Annually, wholesale prices advanced 1%, less than the 1.3% expected.

Excluding food and energy, the core PPI was unchanged. The forecast was for a 0.2% rise. Annually it was up 1.8%, tad lower than expectations of 1.9%.

Economist Ian Shepherdson of Pantheon Macro says the “headline was depressed by a 0.9% drop in food prices, while energy prices rose 0.4%. In the core, goods prices were unchanged, thanks in part to an unexpectedly steep 3.0% plunge in used car prices, the biggest drop since July 2006.”

With the PPI now in, his model indicates a 0.15% December rise in the core PCE price index – the Fed’s favorite inflation gauge. He says that’s enough to push annual core PCE inflation “down to only 2.9%,” and that will “increase the pressure on policymakers to ease soon.”

Markets now price in more than an 80% chance of the first Fed rate cut coming in March, up from 60% in the wake of the CPI yesterday.

The bond market rallied following the PPI. Short Treasury yields fell the most and the 2-year ( US2Y ) to 30-year ( US30Y ) yield curve is no longer inverted. The inversion between the 2-year and the 10-year – which is supposed to signal a recession – is down to 20 basis points.

Meanwhile, stocks were choppy, with the Dow ( DJI ) trailing the S&P and Nasdaq, dragged down by a post-earnings price drop in UnitedHealth.

UnitedHealth topped forecasts on the top and bottom lines. But shares sold off on concerns of in the face of rising costs in its insurance arm and Optum business. The company reaffirmed its 2024 outlook for revenue at $400 billion to $403 billion and adjusted earnings per share at $27.50–$28, although the pending sale of its Brazil operations will impact its net earnings by $7 billion this year.

Among other active stocks, Delta Air Lines tumbled on profit guidance. The airline’s EPS forecast for the full year fell below the long-term target for more than $7.00 a share.

Delta said demand for air travel remains strong and noted that its customer base is in a healthy financial position with travel a top priority. It also guided for Q1 adjusted EPS of $1.28 vs. $1.16 consensus.

In other news of note

TKO Group ( TKO ) could be negatively impacted by class action lawsuits surrounding the UFC and weaker-than-expected media rights renewals, according to firm TD Cowen.

Analyst Stephen Glagola says “UFC's competitive advantages as a promoter of mixed martial arts have resulted in longer-term business model risk.” He initiated coverage on the stock with a Market Perform rating and $92 price target.

"We view the upcoming April 8 trial for the certified class action lawsuit of over 1,200 fighters who competed from 2010 to 2017 alleging UFC antitrust violations as an underappreciated risk catalyst that warrants investor focus," he wrote. "We view the potential for significant monetary damages as an impediment for management to announce share repurchases or dividends on the Q4 call."

In the weekly Seeking Alpha Dividend Roundup

This week's activity included increased payouts from Lakeland Financial ( LKFN ) and STAG Industrial ( STAG ) as well as declarations from companies like Proctor & Gamble (NYSE: PG ) and Citigroup (NYSE:C).

Looking towards next week, Caterpillar (NYSE: C AT) and CVS Health ( C VS) will see ex-dividend dates, among others.

And in the Wall Street Research Corner

Goldman Sachs recommended 25 options trades for the most out-of-consensus U.S. stock opportunities this earnings season.

The Goldman Derivatives Research team says the top 25 tactical trades recommendations have outperformed the S&P 500by 2.1% annualized, across 1,175 trades and over the past 12 years, “but would have outperformed by an annualized 5.6% if we skipped names repeated from the prior quarter.”

Among the stocks where they recommend buying calls ahead of earnings Target (TGT), Apple (AAPL), State Street ( STT ) and Waste Management (WM).

In the bearish camp, they recommend buying puts on eBay ( EBAY ) and Roblox ( RBLX ) among others.

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