Bank earnings: Why bank stocks' outlook isn't what it seems

With 2024 off to a rocky start, Wall Street is hoping for smoother sailing to come in the rest of the year. As Big Banks will start to report fourth-quarter earnings on Friday, January 12, many are feeling the upcoming dread as banks are expected to report lower profits after setting money aside to cover souring loans while paying more to depositors.

Christine Short, Wall Street Horizon VP of Research, joins Yahoo Finance to give insight into why investors should reframe their points of view on the outlook for bank stocks as they look for investment opportunities.

"Sell-side analysts have been lowering their guidance, that's because companies have been lowering their guidance. I always take that with a bit of a grain of salt," Short explains. "Going into the season, companies pull back a little bit. They're conservative because they want to lower that bar so that they end up beating, the stock pops, it's ultimately better for the stock."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino.

Video Transcript

SEANA SMITH: Yes, it has certainly been a rough start to the year for stocks with all three of the major averages ending the first week of the year, lower snapping that nine week winning streak. Now analysts as a result of some of the recent moves and valuations that we've seen for the companies lowering their earnings projections for S&P 500 companies heading into the fourth quarter earnings season, that kicks off on Friday. We'll hear from a number of the big banks.

Now despite some of the sour sentiment that we are hearing on the street, our next guest identifying two potential bright spots for banks this earnings season. We want to bring in Christine Short Wall Street horizons Vice President of Research.

Christine, it's great to have you here. So I think investors, as we take a step back and we're trying to play out or design this playbook here for our viewers heading into earnings season, starting with the banks. What are you a bit optimistic about heading into these reports?

CHRISTINE SHORT: So despite the lay of the land that you just gave, yes, companies guidance has been lowered or analysts have been lowering-- sell-side analysts have been lowering their guidance. That's because companies have been lowering their guidance.

I always take that with a bit of a grain of salt, right? Because going into the season, companies pull back a little bit. They're pretty conservative because they want to lower that bar so that they end up beating, the stock pops, right? It's ultimately better for the stock.

So I take company guidance with a grain of salt. We track a proprietary metric called the Late Earnings Report Index. It looks at outlier confirmed-earnings dates, those that have delayed earnings versus those that have advanced them, and that's actually tracking really well. Less companies are delaying earnings going into the season.

Why is that important? Well, academic research shows if companies push their earnings out, it tends to correlate highly with bad news being shared on the call, right? If you have bad news to share, you kind of want to push it, right?

And so that index is at the lowest we've seen it since we started tracking in 2015. So for us that means companies are less uncertain going into the season, which I think is great because 2023 was marked by uncertainty, right?

Like, are we going to have a soft landing? Are we going to have a hard landing? Is there going to be a recession? It ended up being OK. But I think some of those worries you have following us into 2024, which is what you see in some of these numbers.

BRAD SMITH: And so as the banks kick things off, what type of-- perhaps, economic forecasts do you expect them to-- and we've heard from Jamie Dimon in the past talking about a hurricane or classifying things as hurricanes and getting a little bit more meteorologic with it, if you will. What are you expecting that tone to be from them as they kick off?

CHRISTINE SHORT: Yeah, so as you know, the banks kick it off. They're really the bellwether for the rest of the season. They set the tone. And you just mentioned Jamie Dimon. He had some pretty concerning comments last--

I think he used the word, we're in the most dangerous period and we're setting up for a range of outcomes. We're hoping for the best. Things like that don't set the tone very well. Jane Fraser at Citigroup, same thing, talked about CEO optimism and sentiment being quite low in her opinion.

And so investors are really looking to those bank CEOs and that commentary this season to confirm that we are-- the US economy is resilient. We are indeed heading for a soft landing. So we're hoping for softer comments, more positive and optimistic comments, and there's a handful of metrics that we're really going to be looking at.

Provisions for profit-- loan loss provisions, which have been built up in the past. And that really correlates highly with what risks the bank sees. How much they're building up for potential defaults. Lending activity.

We saw some great Mortgage News out today, mortgage applications are up. So is lending activity returning. And then investment banking, which was such a sour note last year, is investment banking activity returning, are we going to see some more M&A and some more IPOs.