Earnings season kicks into high gear this week, but more importantly Donald Trump takes the oath of office to become the 45th president of the United States. Investors hoping for insight on the outlook for corporate earnings under the new administration might be better off looking at Trump's Twitter account than analyst's estimates.
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On multiple occasions the President-elect turned the spotlight on specific companies whose business could be flipped upside down when he takes office. Trump's promises and threats, whether or not they hold, mean one of two things for corporate earnings: estimate activity will plummet or start to inch up.
For the companies expected to benefit from the new administration, estimates for the fourth quarter and beyond have already started to trend higher. This week, reports from Goldman Sachs, Citigroup, Check Point Software Technologies and General Electric will either bolster or undercut the thesis that a Trump presidency benefits certain industries.
One of the major themes expected to dominate earnings season this quarter is the resurgence of Wall Street. Financial stocks soared in the final months of 2016 on speculation Trump would repeal much of Dodd-Frank and on the Federal Reserve's decision to raise rates in December.
Given that the initial round of bank reports came in mixed to positive, the strength of the recent rally appears excessive. That doesn't bode favorably for Goldman Sachs or Citigroup, both scheduled to announce Q4 results tomorrow morning.
Goldman Sachs, in particular, made the largest gains following the election. That sets up the stock for a huge selloff if the report misses target estimates. Analysts at Estimize expect the bank to turn $4.89 per share on the bottom line, reflecting a 2 percent increase from a year earlier. That estimate improved by 13 percent since the bank's most recent report in October. Revenue for the period is forecasted to increase by 4 percent to $7.58 billion, marking two consecutive quarters of positive growth.
Goldman Sachs stands to profit from an improving economy and higher rates, which would help its trading business and lending spreads, respectively. Trading revenue will continue to rise on the back of growing fixed income, currency and commodities trading, while the post-election volatility is expected to drive equity trading. Meanwhile improving underwriting and M&A activity in 2016 positions the bank to grab extra top line support.
While the stars appear aligned heading into tomorrow's report, any sign of weakness will undoubtedly punish shareholders. Goldman's vast exposure to international markets makes it prone to currency headwinds and macroeconomic uncertainty, especially in Europe.