Earnings results from the big banks highlight the benefits of diverse revenue streams, with JPMorgan (JPM - Free Report) and Citigroup (C - Free Report) offsetting decelerating loan growth trends with gains from their investment banking businesses. Wells Fargo (WFC - Free Report) has been dealing lately with a number of company-specific issues, but the absence of a strong investment banking franchise was very much apparent in its earnings.

The loan growth deceleration in all of these reports didn’t come as a surprise - we had seen it in Fed data already. Some of the explanations offered include lower mortgage activity in the wake of higher rates, weak car loan demand and strong capital markets activities prompting big commercial and industrial borrowers to use the bond markets instead of banks.

But these explanations for the slowdown are far from satisfactory, particularly given the backdrop of steadily improving consumer and business confidence and expectations of ramped up U.S. economic growth. That said, the tepid loan demand picture is nevertheless a bigger issue for the regional banks that will be coming out with quarterly results this week. In total, we have 178 companies reporting Q1 results this week, including 61 S&P 500 members.

Finance Sector Scorecard

It is still fairly early, with results from only four Finance sector companies in the S&P 500 (out of 94 total) out already, but these four companies are the some of the largest in the entire index and account for 21.6% of the sector’s total market capitalization in the index. Total earnings for these four Finance sector companies are up +10.8% from the same period last year on +3% higher revenues, with all four beating EPS estimates but only two beating top-line estimates.

This is better earnings growth than we have seen from the same group of four banks in other recent periods, which is having a favorable impact on the aggregate Q1 growth expectation for the sector as a whole. The chart below compares the growth pace (earnings and revenue) and proportion of positive surprises for these 4 banks with what we saw from this same group of companies in other recent periods.

Total Q1 earnings for the Finance sector as a whole, combining the reported actuals with the still-to-come estimates, are expected to be up +11% from the same period last year. The table below shows the sector’s Q1 earnings growth expectations at the medium-industry level contrasted with estimates for the following four quarters and actual results for the preceding four periods.

Please note that the Major Banks industry, of which JPMorgan, Wells Fargo and others are part, accounts for roughly 45% of the sector’s total earnings (insurance is the second biggest earnings contributor, accounting for about 25% of the total).

Expectations for Q1 As a Whole

Total Q1 earnings are expected to be up +7.6% from the same period last year on +6.3% higher revenues. This would follow +7.4% earnings growth in 2016 Q4 on +4.7%, the highest growth pace in all most two years.

The table below shows the summary picture for Q1, contrasted with what was actually achieved in Q4.

Please note that the Q1 earnings season follows the strong showing on the earnings front in the preceding reporting cycle. Not only did 2016 Q4 growth reach the highest in two years, but total earnings for the quarter also reached a new quarterly record. The strong Q4 performance came after the first positive earnings growth in 2016 Q3, having declined in each of the preceding five quarters.

The chart below shows the Q1 earnings growth contrasted with what is expected in the following three quarters and actual results in the preceding five quarters. As you can see in the chart below, the growth pace is expected to ramp up in 2017.

You can see this improved earnings backdrop as the chart below of the S&P 500 relative to forward 12-month Zacks Consensus estimates shows

Please note that the earnings backdrop has not changed in any meaningful way since the November elections, notwithstanding the market’s strong gains since then.