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How’s the Consumer Doing? Financial Sector Earnings Next Week Could Help Tell Us

Key Takeaways:

  • Big banks to kick off reporting season the week of October 14
  • Earnings for sector expected to fall slightly, analysts say
  • Brexit, trade, consumer health on topic list for Financial earnings calls

During Q2 earnings season, Financial sector results helped renew investor confidence in the U.S. consumer.

The question heading into Q3 is whether banking executives still see the same kind of strength, and if they think it can continue amid trade wars, Brexit, and signs of weakness in the U.S. economy.

Over the last three months, as the broader stock market rallied to an all-time high, slammed the brakes, and then re-tested earlier peaks, consumer health arguably did much of the heavy lifting. It felt like every time stocks pulled back, they got a second wind from retail sales, housing or some other data or earnings news that showed consumers still out there buying.

Today In: Money

The banks played a huge role in setting the stage by reporting better-than-expected Q2 results that showed signs of strong consumer demand even as some of the banks’ trading divisions took a hit. Next week, six of the biggest banks come back to talk about their Q3 experience and what they expect for Q4. Analysts expect Financial sector earnings to drop slightly in Q3.

That said, most of the major banking names have done an excellent job keeping costs in check as they wrestle with fundamental industry headwinds like falling interest rates and slowing revenue from their trading divisions. This time out, it wouldn’t be surprising to see more of the same, and you can’t rule out a bit more vigor from the trading business thanks to all the volatility we saw in the markets last quarter.

Earnings growth may not be there for Financials this time around, or it could be negligible. At the end of the day, though, Financial companies are still likely to be remarkably profitable considering a yield curve that remains relatively flat and global macroeconomic concerns, according to Briefing.com. This sector knows how to make money, but it might just not make as much as it did a year ago. Earnings will likely show large banking companies still in good financial condition with the U.S. consumer generally in decent shape for now, as the U.S. economy arguably remains the best-kept house on a tough block.

Investors have started to pick up on all this, judging from the S&P 500 Financial sector’s good health over the last month and year to date. The sector is up 3.4% from a month ago to easily lead all sectors over that time period, and up 15% since the start of 2019. The 15% gain is below the SPX’s 17% year-to-date pace, but it’s an improvement after a few years when Financials generally didn’t participate as much in major market rallies.

What to Listen For

No one necessarily planned it, but it’s helpful in a way that banks report early in the earnings season. Few other industries have larger megaphones or the ability to set the tone like the biggest financial institutions can. The other sectors are important, too, but they often see things from their own silos. Combined, the big banks have a view of the entire economy and all the industries, as well as what consumers and investors are doing. Their positive remarks last quarter didn’t really give Financial stocks an immediate lift, but it did apparently help reassure investors who were nervous about everything from trade wars to Brexit.

Going into Q3 earnings, those same issues dog the market, and bank executives have a front-row seat. How do they see trade negotiations playing out? Can consumers hold up if trade negotiations start to go south? How’s the consumer and corporate credit situation? Will weakness in Europe spread its tentacles more into the U.S.? And is there anything bank CEOs think the Fed or Congress can do to fend off all these challenges?

On another subject closer to the banks’ own business outlook, what about the shaky initial public offering (IPO) situation? That’s getting a closer look as a few recent IPOs haven’t performed as well as some market participants had expected. One question is whether other potential IPOs might get cold feet, potentially hurting businesses for some of the major investment banks.

All the big bank calls are important, but JP Morgan Chase (JPM) on Tuesday morning might stand out. Last time, CEO Jamie Dimon said he saw positive momentum with the U.S. consumer, and his words helped ease concerns about the economic outlook. More words like that this time out might be well timed when you consider how nervous many investors seem to be right now. On the other hand, if Dimon doesn’t sound as positive, that’s worth considering, too.

While few analysts see a recession in the works—at least in the short term—bank executives might be asked if they’re starting to see any slowdown in lending, which might be a possible sign of the economy putting on the brakes. Softer manufacturing sector data over the last few months and falling capital investment by businesses could provide subject matter on the big bank earnings calls.

Regionals Vs. Multinationals

While big banks like JPM operate around the world and might be particularly attuned to the effects of trade, regional banks make most of their loans within the U.S., potentially shielding them from overseas turbulence.

Regional banks also might provide a deeper view into what consumers are doing in the housing and credit card markets. With rates still near three-year lows, we’ve seen some data suggest a bump in the housing sector lately, and that’s been backed by solid earnings data out of that industry. If regional banks report more borrowing demand, that would be another sign pointing to potential strength in consumer sentiment. Refinancing apparently got a big lift over the last few months, and now we’ll hear if banks saw any benefit.

One possible source of weakness, especially for some of the regional players, could be in the oil patch. With crude prices and Energy sector earnings both under pressure, there’s been a big drop in the number of rigs drilling for oil in places like Texas over the last few months, according to energy industry data. That could potentially weigh on borrowing demand. Also, the manufacturing sector is looking sluggish, if recent data paint an accurate picture, maybe hurting results from regional banks in the Midwest. It might be interesting to hear if bank executives are worried more about the U.S. manufacturing situation.

Another challenge for the entire sector is the rate picture. The Fed lowered rates twice since banks last reported, and the futures market is penciling in another rate cut as pretty likely for later this month. Lower rates generally squeeze banks’ margins. If rates drop, banks simply can’t make as much money.

The 10-year Treasury yield has fallen from last autumn’s high above 3.2% to recent levels just above 1.5% amid fears of economic sluggishness and widespread predictions of central bank rate cuts. The long trade standoff between China and the U.S. has also contributed to lower yields as many investors pile into defensive investments like U.S. Treasuries, cautious about the growth outlook.

Another thing on many investors’ minds is the current structure of the yield curve. The 10-year and two-year yields inverted for a stretch in Q3, typically an indication that investors believe that growth will be weak. That curve isn’t inverted now, but it remains historically narrow. Still, some analysts say the current low five-year and two-year yields might mean healthy corporate credit, maybe a good sign for banks.

Q3 Financial Sector Earnings

Analysts making their Q3 projections for the Financial sector expect a slowdown in earnings growth from Q2. Forecasting firm FactSet pegs Financial sector earnings to fall 1.8%, which is worse than its previous estimate in late September for a 0.9% drop. By comparison, Financial earnings grew 5.2% in Q2, way better than FactSet’s June 30 estimate for 0.6% growth.

Revenue for the Financial sector is expected to fall 1.6% in Q3, down from 2.6% growth in Q2, FactSet said.

While estimates are for falling earnings and revenue, the Financial sector did surprise last quarter with results that exceeded the average analyst estimate. You can’t rule out a repeat, but last time consumer strength might have taken some analysts by surprise. Now, consumer strength in Q3 seems like a given, with the mystery being whether it can last into Q4.

Upcoming Earnings Dates:

  • Citigroup (C) – Tuesday, October 15
  • JPMorgan Chase & Co. (JPM) – Tuesday, October 15
  • Wells Fargo (WFC) – Tuesday, Oct. 15, (B)
  • Goldman Sachs (GS) – Tuesday, October 15
  • Bank of America (BAC) – Wednesday, October 16
  • Morgan Stanley (MS) – Thursday, October 17

TD Ameritrade® commentary for educational purposes only. Member SIPC.

I am Chief Market Strategist for TD Ameritrade and began my career as a Chicago Board Options Exchange market maker, trading primarily in the S&P 100 and S&P 500 pits. I’ve also worked for ING Bank, Blue Capital and was Managing Director of Option Trading for Van Der Moolen, USA. In 2006, I joined the thinkorswim Group, which was eventually acquired by TD Ameritrade. I am a 30-year trading veteran and a regular CNBC guest, as well as a member of the Board of Directors at NYSE ARCA and a member of the Arbitration Committee at the CBOE. My licenses include the 3, 4, 7, 24 and 66.

Source: How’s the Consumer Doing? Financial Sector Earnings Next Week Could Help Tell Us

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JP Morgan Chase: https://www.zacks.com/stock/quote/JPM… PNC Bank: https://www.zacks.com/stock/quote/PNC… US Bank: https://www.zacks.com/stock/quote/USB… Banks are usually at the front of earnings season and help to set the tone for the rest of the market. However, with a terrible interest rate outlook, can the space still post good profits and give us a positive lead-off for this earnings season? Follow us on StockTwits: http://stocktwits.com/ZacksResearch Follow us on Twitter: https://twitter.com/ZacksResearch Like us on Facebook: https://www.facebook.com/ZacksInvestm…

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Why Your Customers Should Be Central To Your Innovation Efforts

There’s a big mistake that a lot of companies make. It’s one that until a few years ago was common in my own organization, and it stems from a worthy goal: to boost innovation. The mistake is adopting what I call the “science fair” mentality: encouraging employees throughout the organization to innovate freely but without much, if any, direct contact with the very customers these innovations are intended for.

Unconstrained innovation sounds exciting, like the sort of thing startups do. But the truth is that successful startups actually don’t do that, because they know that innovation without a framework rarely leads to business success. It does lead to inventions that are impressive and creative, but they ultimately prove impractical or irrelevant for driving business growth.

How, then, can you get employees to innovate products and services that actually improve the performance of your business? The answer is by creating a structure that involves your customers, from an early stage, in your innovation efforts.

Focusing on the customer (for real)

It’s a rare company these days that doesn’t claim to put its customers first. It’s also a rare company that doesn’t do market research. But what is exceptional is a company with a framework to channel innovative energies so that they solve customer pain points and result in a commercial outcome the market will pay for.

Getting employees to innovate products and services that improve the performance of your business requires a structure that involves customers, from an early stage, in your innovation efforts.

Building this framework does not mean stifling creative energies under a heavy layer of bureaucracy. Rather, it means making sure that the innovation responds to customer needs and has the flexibility to evolve as you better understand those needs.

For instance, one of the projects I lead at PwC, the Global Innovation Challenge, could be a model for your organization. Invite employees from around your network, from all disciplines, to submit early-stage, technology-enabled business solutions. But require that before a team can enter the contest, it must include examples of marketplace interest — not just an explanation of how (and how soon) the project will meet specific client needs, but also feedback from potential or actual clients on a prototype or pilot.

Internal incubators are also ways you can create ongoing feedback loops with the marketplace. Multiple customer and third-party interviews and growing signs of market interest are required for a project to receive and keep funding from these groups. As you assess the customers’ feedback, the teams make changes in line with the customers’ needs — and if the market response isn’t promising, you pull the plug.

Four steps to make customers your innovation partners

No part of this process is improvised: Criteria and milestones are critical, including a framework that ensures that the customers are guiding the innovation. To take just one example, before PwC New Ventures, an internal software-as-a-service incubator, releases the first round of funding for a project, it needs to see at least 20 interviews with customers. Indeed, many projects have more than 100 interviews over the development period.

Here are some ideas to get that innovation-guiding framework started:

1. Get specific. It’s not enough to say “talk to customers” or “research the market.” Set specific criteria for the quantity and quality of customer interviews.

2. Set milestones. Even after you’ve made the decision to invest in an innovative project, continue to check not just technical progress, but also customer feedback, on a regular basis.

3. Offer expert guidance. Brilliant technical minds aren’t always brilliant at interacting with customers. Assign a person or team to train technical people on customer outreach, and to do the outreach directly when needed.

4. Set procedures to react. Ensure that the team has the time and the processes to reflect on market feedback and adjust design appropriately. Be ready, if the feedback is poor, to terminate the project and reallocate resources.

What happens when you listen

A team at PwC recently developed a new tool for franchise owners designed to quickly, easily, and digitally market their stores. The team planned to make this digital platform the core feature of a new product.

Following our framework — and our core principle of customer-driven innovation — PwC team members reached out to customers. Listening to the franchise owners, the team learned that one of their top priorities was to support their customers, the franchisees. So the team members went back to work, adding components that the owners could use to help franchisees reach their end-users. The resulting product that was introduced to the marketplace attempted to solve problems for our clients while enabling them to solve problems for their clients.

The result of listening with empathy and emotional intelligence is that you will be able to not just mostly fulfill a customer’s needs but truly fulfill them, which is usually the difference between that customer ultimately buying or not buying your product.

Another big benefit of really listening is stronger customer relationships. After frequent interactions with your design teams to ensure that the final product will meet your customers’ needs, these customers start to view your people as partners and friends. And frequently, customers discover needs — which your new product or service can meet — that they didn’t even know they had.

If your innovation efforts are to truly add value to your business, customer-centricity will have to be more than a motto. It will have to be a framework to turn your customers into your innovation partners. The insights they bring will make all the difference in ensuring that the product not only solves their problems, but also provides an exceptional experience they’ll keep coming back for.

Vicki Huff By: Vicki Huff

Source: Why your customers should be central to your innovation efforts

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When Baker launched Next Level Fitness with her husband in 2009, she knew that affordability and an inclusive, welcoming gym environment were key to growing the business. “We had to keep prices low enough so that the average person would come to us,” Baker says. Next Level offers an introductory six-week program of training sessions for $99, an accessible price point for her customers.

 

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