The Truth About Bank of America’s “Earnings Beat”

Bank of America CEO, Brian Moynihan

Another day, another new all-time high for the market. This time around, it’s the signing of the U.S./China trade deal that’s got bulls buzzing, along with the start of a critical earnings season.

The S&P, Dow, and Nasdaq Composite are all up as of midday, rising 0.40%, 0.55%, and 0.60%, respectively.

The continued surge of positive sentiment can also be attributed to a statement out of Washington this morning, in which White House economic advisor Larry Kudlow said that the Trump administration would reveal more tax cuts later this year.

By putting more cash in American pockets come tax time, the President hopes to “goose” the economy further. Avoiding a slowdown in an election year seems to be one of Trump’s primary goals.

Whether a contraction can be avoided or not remains to be seen. For now, analysts still believe we’re set for a “cooling off” period in Q3 and Q4.

Of course, they said that around the same time last year as well, months before Q3 corporate earnings blew away estimates.

Admittedly, expectations were probably too low back in 2019. Earnings growth for Q3, in the grand scheme of things, was not entirely impressive.

But it was enough to push the market higher, especially after the U.S. and China struck a “phase one” trade deal – an agreement that was finally signed this morning.

And though the deal won’t remove any existing tariffs, it did manage to suspend a set of new ones from going into effect. Today’s signing represents a symbolic crossing of the trade war “finish line” in the first leg of a multi-phase relay.

What comes next in “phase two” will likely have a more dramatic effect on the market.

But for now, bulls are happy to see Beijing and Washington getting along. They’re also basking in the afterglow of a better than expected quarterly earnings report, released earlier this morning. Bank of America (NYSE: BAC) posted an EPS (earnings per share) of $0.74 vs. the consensus estimate of $0.68, helped by a recent reduction in outstanding shares (via stock buybacks).

Revenue, fell 1% to $22.5 billion, but still beat the $22.35 billion estimate. The bank’s quarterly profit hit $7 billion, dropping 4% year-over-year.

So, while B of A didn’t beat its Q4 2018 numbers, the company managed to surpass expectations, echoing what happened with Q3 earnings released late last year, meaning that analysts may have come in a little too pessimistic once again.

If investors don’t recognize that, the market could see yet another artificial lift caused by faux-earnings beats from companies that saw revenue reductions.

That’s not to say shrinking year-over-year growth is a major sin, nor a worthy reason to start selling. The fact that so many corporations managed to come close to matching their 2018 growth – a year in which GDP (gross domestic product) growth touched 3.4% in Q3 – might be worth celebrating.

But it is indicative of a disconnect between Wall Street and what’s actually going on with American corporations. If analysts continue to set the bar too low, investors may ultimately pay the price when faced with truly destitute earnings.

Which, again, based on a recent Dow survey of top economists, could be coming in the latter half of this year.

For now, though, let the optimists celebrate what could be another lukewarm season of revenues. Because until bulls see a correction, they’ll keep buying, providing opportunistic traders a chance to grab even more profits in this “never go down” market.


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