Major banks will continue reporting first-quarter results in the coming days, but enthusiasm for the group has waned after JPMorgan (JPM) posted a 21% decline in sequential profit and a 42% slump in earnings from a year ago (Q1 EPS of $2.63 vs. $2.73 consensus expectations, declined from $3.33 in Q4 2021 and $4.50 in Q1 2021).

Investors will have another opportunity to assess the health of the sector on Thursday when some of the largest financial institutions, such as Goldman Sachs (GS), Wells Fargo (WFC), Citigroup (C), and Morgan Stanley (MS) announce key performance metrics before the opening bell.

Commercial and investment banks, as lenders and deal-making institutions in the capital markets, have a front-row view of the economy, so traders should watch their bottom- and top-line figures, but more importantly, pay close attention to their forward guidance amid rising consumer prices, cooling activity and rising yields. Although higher interest rates bode well for lenders, slower growth depresses loan demand, while wage inflation erodes margins.

Focusing on JPMorgan, its CEO, Jamie Dimon, didn't hit the panic button during the earnings call but noted in no uncertain terms that there are "storm clouds on the horizon", citing inflation and geopolitics as two powerful forces threatening the economy. Asked about the broader path ahead, Dimon did not predict a recession but did not rule it out entirely, offering caution about the outlook. In this regard, the bank's decision to increase credit reserves and set aside $902 million for potential losses is a clear reflection of rising downside risks rather than a bullish signal to get excited about.

If JPM’s lackluster numbers are anything to go by, we should expect more of the same in the coming days and weeks. This could mean further losses for financial stocks and sector-linked ETFs such as XLF.

GOLDMAN SACHS

Analysts expect earnings per share of $8.61 on revenue of $12.67 billion. Quarterly results and guidance, however, could disappoint as investment banking revenues are projected to decline further as firms delay merger and acquisition transactions and postpone IPOs amid increased volatility and growing risks about the economy

WELLS FARGO

Wall Street forecasts earnings per share of $0.81 on revenue of $17.89 billion. WFC has more exposure to commercial banking, so the slowdown in capital market dealmaking activity will not be overly detrimental to the institution's bottom line. Having said that, traders should focus on guidance for loan demand and interest income, and whether or not higher rates in the economy are translating into juicier margins firmwide.

CITIGROUP

Investors expect earnings per share of $1.66 on an $18.52 revenue for the first quarter, but the market is not very upbeat about the bank’s results. Citi has a poor execution track record and has been a serial underperformer in recent years. Its fortunes may not change this time around, as the bank likely sustained large losses in connection with its withdrawal from Russia, complicating its turnaround efforts. In terms of guidance, the net interest income outlook will also be key for Citigroup.

MORGAN STANLEY

Analysts expects earnings per share of $1.69 on a $292.51 billion revenue. Like Goldman Sachs, Morgan Stanley’s performance will be negatively impacted by falling investment banking fees, such as those tied to initial public offerings and debt issuance deals. Revenue for its wealth management arms is also likely to disappoint on account of equity market turbulence. The bank’s FICC division, however, may see significant windfalls resulting from higher trading volume and volatility levels recorded during the first quarter following the invasion of Ukraine.

Earnings expectations summary:

Source: Earnings Whispers