Banks kick off low-expectation earnings season

Big banks and other financial companies will dominate the start of earnings season this week, as the sector is expected to underperform the broader S&P 500 index in a quarter where expectations have already dropped considerably.

Stocks finished slightly lower the past week with both the Dow Jones Industrial Average DJIA, -0.95% and the Nasdaq Composite Index COMP, -0.68% down 0.5%, and the S&P 500 index SPX, -0.84% off by 0.7% after the December jobs report on Friday showed a decline in wages.

Earnings for the fourth quarter are expected to grow by 1.1%, according to John Butters, senior earnings analyst at FactSet. That’s down from the 1.6% growth estimate at the end of the quarter, and well below the expectations of 8.4% growth at the start of the fourth quarter.

Then again, seeing those estimates are traditionally lowballed, earnings growth should work out slightly higher, by about 2.1 percentage points on average, according to Butters. Companies are fairly pessimistic, or lowballing more than usual, as 81% of those providing an earnings outlook for the fourth quarter have given one that has fallen below the Wall Street consensus.

Big banks and financial firms kick off earnings season this week after Alcoa Inc. AA, +1.32% reports on Monday. The financial sector is expected to underperform the S&P 500 on earnings and revenue for the fourth-quarter with a 1.7% decline on earnings and a 1.8% increase in revenue, according to FactSet.

White expects the next few weeks to be “a tale of two earnings seasons,” where lower energy prices hit energy sector earnings but may benefit other sectors like consumer discretionary, manufacturers, and airlines. One big name in energy reports this week Schlumberger Ltd. SLB, -0.82% on Friday.

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