Note: The following is an excerpt from this week’sEarnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Here are the key points:

•    Bank earnings were very strong in the last earnings season, but Q2 estimates came down to reflect the unfavorable interest rate and capital markets backdrop.

•    While Q2 earnings growth for the banking industry is expected to be below the year-earlier level, quarterly earnings for the Finance sector as a whole are expected to be up +4.6% from the same period last year on +1.7% higher revenues. This would follow +10.5% earnings growth on +5.2% higher revenues in Q1.

•    For the S&P 500 Index as a whole, total Q2 earnings are expected to be up +5.6% from the same period last year on +4.5% higher revenues. Sectors with the strongest growth in Q2 include Energy, Technology, Aerospace, Construction and Industrial Products. Q2 earnings growth for the index would fall to +3.0% on an ex-Energy basis.
 
•    Q2 Estimates came down since the quarter got underway, but the magnitude of negative revisions has been below other recent periods. Estimates came down for 10 of the 16 Zacks sectors since the start of the quarter, while estimates went up for 6 sectors in that time period, including Industrial Products, Transportation, Construction, Aerospace, Technology and Business Services.

•    Beyond Q2, total earnings for the S&P 500 index are currently expected to grow by +6.1% on +4.5% higher revenues in the September quarter and +9.7% on +5.2% higher revenues in Q4.  

•    For full-year 2017, total earnings for the index are expected to be up +7.4% on +4.1% higher revenues, which would follow +1% earnings growth on +2% higher revenues in 2016. Index earnings are expected to be up +11.4% in 2018 and +9.3% in 2019.

•    The Energy, Technology and Finance sectors are the biggest earnings contributors in 2017 – 2017 earnings growth would be +4.7% on an ex-Energy basis.

Earnings growth for the Zacks Major Banks industry, which includes the money-center operators like JPMorgan (JPM), Citigroup (C) and Wells Fargo (WFC) that are reporting results Friday morning, is expected to be down -6% from the same period last year on +3% higher revenues. This would follow the group’s strong showing in Q1, when total earnings for the industry increased +19.4% on +5.9% higher revenues.

The industry’s actual growth will most likely be better than these expectations, but they are unlikely to be as strong as what we saw in Q1. The factors expected to weigh on the group’s Q2 profitability include lower treasury yields (since partly reversed), continued deceleration in loan growth, and an overall trough backdrop for the capital market and advisory businesses. Estimates for a number of these banks have come down lately to reflect these developments, but I suspect that they haven’t fallen enough to fully reflect the relatively softer ground realities.

With the Major Banks industry accounting for roughly 45% of all Finance sector’s earnings, this relatively soft earnings backdrop is weighing on expectations for the broader sector as a whole. Total Finance sector earnings for Q2 are expected to be up +4.6% from the same period last year on +1.7% higher revenues. The chart below contrasts the sector’s Q2 expectations with what was actually achieved in the preceding two quarters and what is expected in the following four quarters.