U.S. Bank Earnings Season Begins! What to Watch? Is Warren Buffett's Sell-Off a Sign of Foresight?

Investment Insights - Bank earnings are expected to be mixed, but in the context of a soft economic landing, the rate-cutting cycle could boost bank stock prices.

On October 11, U.S. banks will kick off the Q3 2024 earnings season.

JPMorgan Chase and Wells Fargo will report earnings on October 11, while Bank of America, Goldman Sachs, and Citigroup will release their results on October 15. Morgan Stanley will follow on October 16.

Bank Earnings Expected to Be Mixed, Focus on Net Interest Income and Investment Banking

Analysts point out that banks’ overall profits will be impacted by declining net interest income and potentially increased loan loss provisions.

According to FactSet, the financial sector's earnings are projected to decline by 0.4% year-over-year in Q3. Bank earnings, in particular, are expected to drop by 12%, making it the biggest drag on the sector.

On the bright side, the Federal Reserve's rate cuts have helped revive investment banking activities, with an overall increase in bond and equity issuance across major banks in Q3.

In detail, JPMorgan Chase is expected to be hit hardest by declining net interest income, while Goldman Sachs and Morgan Stanley, whose business models are more reliant on investment banking, are likely to benefit from the recovery in this segment.

As a result, analysts expect profits at Goldman Sachs and Morgan Stanley to grow, while other banks may see a decline in earnings.

How Will Bank Stocks Perform in a Rate-Cutting Cycle?

With the Federal Reserve starting its rate-cutting cycle in September, attention on bank stocks has increased.

Historically, rate cuts that occur without a recession have generally been favorable for bank stocks. For example, in 1995, 1998, and 2019, rate cuts spurred a rise in U.S. bank stocks.

In the context of a soft landing, U.S. bank stocks tend to outperform the S&P 500 by nearly 10% in the quarter following the first rate cut.

However, if rate cuts are accompanied by a recession, the outlook for bank stocks becomes far less optimistic.

Is Buffett's Massive Sell-Off of Bank of America a Sign He’s Pessimistic About the U.S. Economy?

Between October 3-7, Warren Buffett further reduced his stake in Bank of America, cashing out $383 million, bringing his holding down to 10.1%. Since mid-July, Buffett has sold off nearly $10 billion in total.

There are mixed views on Buffett’s motives for reducing his stake in Bank of America.

Some believe it’s due to high U.S. stock valuations. Others suggest that Buffett might be concerned about potential recession risks in the U.S. economy.

Additionally, some analysts have noted that U.S. regulators are ramping up efforts to combat money laundering tied to fentanyl, which could lead to regulatory challenges for banks like Bank of America in the future.

Regardless, these ongoing sell-offs indicate that Buffett is becoming increasingly cautious.