Earnings season is a critical test for a stock market on the road back to a record

The big banks start off third quarter earnings season, and investors will be most focused on guidance to see if earnings can propel the market back to its highs.

The S&P 500 closed at 3,534 Monday, about 1.5% from its previous high.

Banking bellwether JPMorgan reports Tuesday morning, as do Citigroup and BlackRock.
Delta Airlines and pharmaceutical maker Johnson and Johnson also report Tuesday. Bank of America, Goldman Sachs, Wells Fargo and PNC release earnings Wednesday.

“The bank stocks haven’t done anything in nine months. If JPMorgan is solid, and traders can’t sell it down, the banks could help take S&P to the highs of the year,” said Scott Redler, partner with T3Live.com. He said technically the market is in good shape, with big tech taking the lead Monday after a rest last week, but a broad group of stock also participated in the rally.

“JP Morgan has critical range resistance at $105 to $107. If it could get above that, it could open the door for a better move in to year end,” said Redler.

Analysts say they are looking for much more in the way of guidance this quarter, after many companies withdrew outlooks during the pandemic shutdowns.

“There will be some companies that weathered the storm better than others, and there will be others who say it’s gotten more challenging, and we don’t know how this is going to work out,” said Peter Boockvar, chief investment strategist at Bleakley Advisory Group.

Since the pandemic, companies have provided various amounts of visibility into their businesses, but many companies have still not provided guidance.

While banks are the first big group out with reports, they may not set direction for the rest of earnings season.

“You look at the last four to six quarters, the tone the banks set and the way the stocks actually trade can be very divergent, and it can be very temporary,” said Julian Emanuel, head of equity and derivatives strategy at BTIG.

Deutsche Bank said second quarter earnings beat at an unprecedented rate of 85%. More typically, 65% of companies beat forecasts. Companies’ beat margin was 20% above estimates, also unusual.

Emanuel said he is not looking for as many beats this quarter. If banks were to surprise to the upside, it could be due to what they say or do about reserves on loan losses. On the other hand, their comments could also sound negative if they discuss the capital markets outlook for next year, which is unlikely to match this year’s activity or gains.

Earnings overall are expected to decline by 20.7%, and financials earnings are expected to be down 17.6%, according to I/B/E/S data from Refinitiv. The worst group is expected to be energy, down 117%.

JP Morgan CEO Jamie Dimon is also known to make important comments on the markets and economy. As for JPMorgan itself, in the past five years it has beaten earnings and revenue estimates 84% of the time, according to Biriniyi Associates, .

“However, this does not always develop into price gains. On just an earnings beat, the stock traded higher just half the time – and on average gained 4.22% to the next earnings report,” notes Birinyi.

Emanuel said he’s watching the companies that have not yet provided guidance carefully, since some companies that initially withheld guidance due to the pandemic, later provided it and many of their stocks then outperformed.

Some of the companies that have not yet provided guidance include Illinois Toolworks, IDEXX, Union Pacific, Mastercard, and Intuitive Surgical. Retailers on that list include Walmart, Home Depot and Target.

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