Wall Street delivered up a pretty stern lesson in spread betting this week as a series of better-than-expected results from the largest US banks dealt a blow to bearish speculators.

Earnings Shattered

 

In absolute terms, it was a shocker of a quarter for the big Wall Street beasts. Average earnings at the top six –Goldman Sachs, Citigroup, Wells Fargo, Morgan Stanley, Bank of America and JPMorgan – declined by 9% in 1Q 2016 versus the same quarter a year ago.

Net income at the banks slumped 24% despite some aggressive cost-cutting, highlighting the sector’s problem in responding to falling revenues.

It was the biggest quarterly decline since 2011 and a sign that market volatility is hitting the financial sector. The S&P 500 had a turbulent first quarter as it first slumped and then recovered strongly towards the end of March and into April. Commodity markets, including oil, endured a similar V-shaped pattern.

Exposure to energy loans was a big factor as US oil and gas companies are feeling the pinch of lower crude prices. But so too was the slump in investment banking as turbulence spooked investors. Retail was better.

Expectations Beaten

 

In spite of the soggy earnings, these were still ahead of expectations, sparking an 8% rally in bank stocks by mid-week.

Certainly 1Q 2015 was a bumper quarter so this year’s results were always going to be poorer, but the extent of the jawboning to lower expectations was impressive.

Despite some gains over recent days, however, banks are still trading close to all-time lows in terms of their share prices versus book value.

Trading Lesson

 

For retail investors and anyone trading stocks, this was an important lesson as it shows the danger of betting on earnings releases. No matter how bad the results – and in the case of US banks they were truly awful - share prices are at the mercy of much more than the cold hard facts. Expectations and sentiment matter a lot too.

It’s not just a problem in equity trading, either. In forex trading, central banks can be notorious for jawboning that results in investor uncertainty.

For example, last December the European Central Bank announced significant fresh easing measures – but these were less than the markets had expected.

UK Banks in Focus

 

Next up for financial earnings season are the big European and UK banks. Standard Chartered, Lloyds, Barclays, Credit Suisse, Deutsche Bank, and Royal Bank of Scotland are all set to report earnings over the coming week.

Expectations are not high after a rough first quarter – according to Bloomberg analysis, quarterly EPS will be down 29% at Barclays and 67% at Deutsche Bank

Analysts say earnings per share at Credit Suisse will plunge a whopping 90%.

But as we saw in the US, when expectations are set so low, it’s tough trying to make a call on the share price.