BofA, JPMorgan, Citi, Morgan Stanley profits under pressure

The outlook for corporate profits is getting worse, and it's not just about the battered energy sector.

Banks, looked to as a bright spot for the upcoming earnings season, might not live up to expectations, according to an analysis from Goldman Sachs.

The firm's analysts have cut profit outlooks for three of the top four money center banks on Wall Street, representing about a 6 percent reduction overall and serving as a sobering sign that the earnings recovery after the financial crisis appears to be running out of steam.

"We believe lackluster 1Q earnings combined with pressure on out year consensus estimates from adjusting for a flatter yield curve sets up a challenging earnings season for money centers," analyst Richard Ramsden and others wrote in a research note.

The warning comes as the Street is preparing for a possible "earnings recession," or consecutive quarters of negative growth. S&P 500 profits collectively are predicted to decline nearly 3 percent in the first quarter, followed by another drop of about 1.8 percent in the second quarter.

S&P Capital IQ analysts see full-year earnings growth of just 0.4 percent, weighed primarily by the energy sector. Lower oil prices are pressuring profits to the point where sector earnings are supposed to suffer annualized declines of 63 percent in each of the first and second quarters and 57 percent for the year.

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The picture is different, though, for financials generally and banks specifically. Financials are projected to be up 10.9 percent in the first quarter, with banks up 25.5 percent. Full-year numbers are 10.2 percent and 19.3 percent, respectively, according to Lindsey Bell, senior analyst at S&P Capital IQ.

However, Goldman said conditions that were supposed to support big-bank profits have changed. Wall Street had been expecting the Federal Reserve to be comparatively more aggressive in raising rates this year and for inflation pressures to build. Neither has happened.

"We expect a continuation of 'Groundhog Day' on rates, as lower-than-expected long-term rates will likely drive management teams to guide for continued pressure on reinvestment yields and consequently incremental pressure on net interest margins until rates rise," Ramsden said. "Additionally, with the most likely path for fed funds now being a September hike and the path of rate increases slower than expected, we believe investors will have to adjust their rate expectations, pressuring out year estimates."

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The "money center" banks Goldman references are Bank of America, Citigroup, JPMorgan Chase and Morgan Stanley. BofA and JPMorgan both are rated "buy" while the others are "neutral." Goldman has not change its price target for any of their shares, but did lower earnings targets.

Collectively, Goldman expects the biggest challenge to the banks this year coming from decreased capital markets activity, a worsening macro outlook and increased regulation as the Dodd-Frank provisions come online.

Big bank earnings blues

Price Target
Old earnings est. Q1
New earnings est. Q1
Old est. 2015
New est. 2015
Bank of America Buy $18 $0.31 $0.28 $1.40 $1.38
Citigroup Neutral $55 $1.43 $1.38 $5.41 $5.35
JPMorgan Buy $67 $1.38 $1.38 $5.83 $5.80
Morgan Stanley Neutral $39 $0.85 $0.78 $2.81 $2.82
Source: Goldman Sachs Global Investment Research