This Sector Is Far Outperforming the Street’s Consensus

Earnings GrowthTwo important banks just reported very solid numbers. That’s important because the financials are a very significant stock market sector that contributes tremendously to investor sentiment and the overall tone for trading action in the capital markets.

Wells Fargo & Company (WFC) beat the Street with a 19% gain in quarterly earnings. The company is the fourth-largest U.S. bank by assets and controls almost 30% of the U.S. mortgage market.

The company’s diluted earnings per share (EPS) grew for the 14th consecutive quarter. Second-quarter earnings were a record $5.5 billion, or $0.98 per diluted share, compared to $4.6 billion, or $0.82 per diluted share, in the second quarter of 2012; second-quarter 2013 earnings are also up from $5.2 billion, or $0.92 per diluted share, in the first quarter.

First-half earnings were a record $10.7 billion, or $1.90 per share, up from $8.9 billion, or $1.57 per share, in the first half of 2012.


Compared to the second quarter of last year, company management cited growth in loans, deposits, and net interest income, and an improvement in credit quality.

Also reporting very good numbers was JPMorgan Chase & Co. (JPM). The company announced second-quarter earnings of $6.5 billion, way up from $5.0 billion in the comparable quarter last year.

EPS grew 32% to $1.60, up from $1.21 in the second quarter of 2012. Total net revenues were $25.2 billion, up solidly from $22.2 billion comparatively.

The company’s total assets under management grew 10% to $2.2 trillion, while total loan balances rose to a record $86.0 billion.

The company also boosted its quarterly dividend payment to $0.38 a share, up from the previous $0.30 a share. JPMorgan handedly beat Wall Street consensus.

The company’s CEO, Jamie Dimon, cited “broad-based signs that the U.S. economy is improving” as the reason for its Wall Street-consensus victory.

But quarterly comparables can be somewhat misleading when it comes to the financial sector. In JPMorgan’s case, the company was forced to increase its loss estimate due to a bad trade in the second quarter of 2012, thereby reducing that quarter’s earnings.

But the company’s latest revenue growth was surprisingly solid.

Individuals may not be enthused about the big banks doing well, but their financial strength is a very important part of confidence in the global capital markets. Their revenue and earnings growth is a reflection of economic conditions, both for Main Street and Wall Street. Improvement in loan losses is also a positive development.

With strength in financials comes greater certainty for the stock market. Good numbers from Wells Fargo and JPMorgan most certainly help to legitimize the stock market’s recent run-up. (See “Corporate Earnings Weakness Should Send You to These Equities.”)

As more earnings pour in, I think it is increasingly likely that the broader market will consolidate on positive results. The main market indices have come a long way already.

With the numbers, company outlooks are critical. Most corporations and Wall Street earnings estimates are weighted to the bottom half of the year, and the market will be looking at company outlooks to reassure this expectation.