Markets are weak Thursday going into earnings season for very good reasons. Until this week, stocks, the dollar, and 10-year yields have mostly moved sideways since mid-December. But this week the 10-year yield has slid to the lowest level since the end of November, and the dollar has slid back to its early December levels.
I have called the market a "coiled spring" several times in the past week because markets are priced for perfection: stocks are at highs, investor sentiment is at highs, and consumer sentiment is at highs.
On top of that, there are high — VERY high — expectations that earnings will expand in 2017. Some are anticipating the S&P 500 could put up a 20 percent increase in overall earnings. That is a LOT to ask.
Throw in the now well-known "Trump tweet risk" and the difficulty of knowing the final impact of the Trump campaign promises of lower taxes/less/regulation/fiscal stimulus, and you've got plenty of reason for the markets to take a pause.
While most industries are not seeing any increase in earnings expectations for 2017 since the election, earnings for big banks have seen modest increases. JPMorgan, for example, has seen 2017 earnings estimates go from $6.25 prior to the election to $6.50 today, according to Factset.
That's a rise of about 4 percent. Other banks have also seen a rise in 2017 estimates since the election:
Banks: 2017 earnings revisions
(since Nov. 1)
JPMorgan: up 4%
Bank of America: up 7.6%
PNCBank: up 3.1%
WellsFargo: up 2.2%
This is good news, but the problem is prices have run up big. The Bank ETF (KBE) is about 20 percent since the elections.
Here's an additional problem: it's highly unlikely we are going to get 2017 earnings guidance from JPMorgan, Bank of America, Wells Fargo or PNC. None of them gave 2016 guidance at this time last year.
JPMorgan CEO Jamie Dimon will certainly comment on the economy (I expect him to be upbeat) but he is notoriously dismissive of guidance. In a 2015 Bloomberg interview, Dimon took a dim view of predicting the future: "Don't make earnings forecasts. You don't know what's going to happen every quarter. I don't even care about quarterly earnings."
Finally, I've been asked repeatedly how to play the bank earnings season. Unfortunately, precedent is not a lot of help. Our partners at Kensho note that JPMorgan has beaten estimates 22 times since 2010—that's about 75 percent of the time. On week later, JPMorgan is down an average of 0.3 percent, while the KBE is down an average of 0.2 percent.
In other words, banks typically do not rally after earnings season.
Where's all this going? I am bullish on earnings for the year, I believe they will see a nice boost. I'm not sure about 20 percent, but 10 percent is certainly doable. But the period we are going into now will be characterized by a dearth of clear information, and the markets need to take a breath and believe the data will be forthcoming.
If it's tax cuts you are looking for, there are some positive signs already: the efforts to remove the Obamacare tax — already underway — will take capital gains taxes from 23.8 percent to 20 percent. That can happen very quickly!