Earnings Preview | Will Bank of America Surprise Despite Forecasted Profit Decline in Q3?

Bank of America (BAC.US) is set to release its Q3 earnings report on October 15th, 2024, Eastern Time. While revenue is expected to increase, profits are anticipated to decline year-over-year. According to Zacks' consensus estimates, the bank’s Q3 revenue is projected to reach $25.33 billion, marking a 0.7% increase from the prior year. However, earnings per share (EPS) are estimated at $0.78, reflecting a 13.3% decline year-over-year.

These consensus forecasts are critical for assessing the bank’s performance outlook, but the stock’s recent movement will likely hinge on how the actual results compare to expectations. A positive earnings surprise could drive the stock price higher, while results that miss estimates may lead to a downturn.

Although management’s commentary during the earnings call will play a pivotal role in shaping both current price movements and future profit expectations, gaining insights into the likelihood of an EPS surprise remains valuable.

Adjustments to EPS Expectations

Over the past 30 days, analysts have revised their Q3 EPS forecasts downward by 3.52%, indicating that analysts have collectively re-evaluated their initial estimates. However, such shifts don't always reflect a unanimous change in sentiment across all analysts.

Analysts who revise their forecasts ahead of the earnings release may have more up-to-date insights into the company's performance, offering potential clues about the upcoming results. Zacks' Earnings ESP (Expected Surprise Prediction) model takes this factor into account. Research suggests that when a stock with a positive Earnings ESP also holds a Zacks Rank of 1 (Strong Buy), 2 (Buy), or 3 (Hold), it generates positive surprises nearly 70% of the time.

Bank of America’s Q3 Outlook

For Bank of America, the most recent and “most accurate” EPS estimates are slightly below the broader Zacks consensus, signaling growing bearish sentiment among analysts. This results in an Earnings ESP of -1.36%. However, the stock currently holds a Zacks Rank of 3 (Hold). Given these indicators, predicting whether BAC’s Q3 EPS will surpass consensus expectations remains challenging.

Historical Performance as a Clue?

When forecasting a company’s future earnings, analysts often consider how closely the company’s past results aligned with previous forecasts. In Q2, for example, BAC's EPS was forecasted at $0.79 but came in at $0.83, beating expectations by 5.06%. Over the past four quarters, the bank has consistently surpassed consensus EPS estimates.

However, strong earnings do not guarantee a positive stock movement. Some stocks decline despite beating estimates due to other disappointing factors. Conversely, unexpected catalysts can drive stocks higher even when earnings miss expectations. That said, betting on stocks likely to exceed earnings forecasts generally improves the odds of success.

Comparison with Peers: JPMorgan Chase

Among its industry peers in the major U.S. regional banking sector, JPMorgan Chase (JPM.US) also faced tempered expectations. The market expected JPM's Q3 revenue to reach $41.01 billion (up 2.9% YoY) and EPS of $4.02 (down 7.2% YoY). However, JPM reported Q3 revenue of $42.65 billion (up 7.0% YoY) and EPS of $4.37, both surpassing consensus estimates.

In the 30 days leading up to its earnings release, analysts trimmed JPM’s EPS forecasts by 1.1%. Interestingly, the “most accurate” recent EPS projections for JPM were higher than consensus, resulting in a positive Earnings ESP of 0.39%. With a Zacks Rank of 3 (Hold), these signals hinted at a strong chance of beating EPS expectations. Indeed, JPM has exceeded market EPS forecasts for the past four quarters.

While Bank of America’s Q2 results offer some optimism, predicting an EPS beat in Q3 is less straightforward, given recent downward revisions and the negative Earnings ESP. However, as seen with JPMorgan, unexpected catalysts or favorable developments could still drive the stock higher even if earnings fall short of expectations. Investors should also pay attention to management’s commentary, as it will provide further guidance on BAC’s future profitability and stock performance.