The first thing to say about credit card profits is that they follow a cycle, just as the economy does. The definitive pattern is expansion, peak, contraction, and trough. Right now, the economy and credit cards are in a contracting model.
Everyone is waiting for a trough, but that looks like it might be a year or so away. The good news is that the current economic data is not permanent. The bad news is that we have not bottomed out yet.
In 1Q20, we saw a glimpse of COVID-19’s impact, but remember that lockdowns and countermeasures only began around March 17th (My marker is St. Patrick’s Day). Well run banks like Bank of America posted a 45% decline in 1Q20 profits, and Chase’s Jamie Dimon wrote in an investor letter that he expects a “bad recession” and that GDP could “plunge 35%.”
New numbers are due this week. 2Q earnings will reflect the first full quarter under COVID-19. It depends on whom you ask, but my view is that we will be dealing with these issues at least through 2Q22. In a CNN Business report, they warn:
- Brace yourself: According to estimates compiled by FactSet, analysts predict that earnings for the S&P 500 plummeted nearly 45%, which would be the most significant drop since a 69% plunge during the depths of the Great Recession in the fourth quarter of 2008. Revenues are expected to have fallen more than 10%. Retailers, energy companies, and industrial firms likely reported the most significant declines in sales and profit.
- Financial firms take center stage this week. JPMorgan Chase, Wells Fargo, Goldman Sachs, Bank of America, and BlackRock are just a few of the big banks and asset managers that will post their latest results.
A significant issue is that we are flying blind. Unemployment issues will not return to normal levels for years; in the Great Recession, it took six to eight years to get down to respectable levels. With COVID-19, we do not know if this is the beginning or the middle of the issue.
- It seems unlikely that many of these firms will provide much in the way of financial guidance due to the uncertain nature of the economy. For what its worth, analysts expect the profit picture to improve as the year progresses. And analysts now predict a big rebound next year, with profits expected to rise 12% in the first quarter and nearly 30% for all of 2021.
So keep your eyes peeled for this week’s report. Know that we have not bottomed out yet, but most importantly, remember that this is part of a business cycle.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group