Earnings Preview: Bank of America Q3 profits expected to decline, will there be a surprise exceeding expectations?

According to the financial news app Zhitong Finance, Bank of America (BAC.US) is set to announce its third-quarter financial results on October 15th, Eastern Time. Market expectations are for an increase in revenue, but a year-on-year decline in profits. Zacks' consensus forecast indicates that the second-largest bank in the United States is expected to have Q3 revenue of $25.33 billion, a 0.7% increase year-on-year. Earnings per share are expected to be $0.78, a 13.3% decrease year-on-year.

This widely known general expectation is crucial for evaluating the company's performance outlook. However, an important factor affecting its recent stock price performance is the comparison between actual results and these expectations. If the results exceed expectations, the release of this financial report may drive the stock price higher, while underperformance could lead to a decline in stock price.

Although discussions by management on the business conditions during the earnings call will mainly determine current price changes and the sustainability of future profit expectations, having insight into the possibility of positive earnings surprises remains valuable.

Looking at the trend of forecast adjustments, over the past 30 days, earnings per share estimates for this quarter have been revised down by 3.52%. This essentially reflects the collective reevaluation of initial estimates by analysts covering the stock during this period. However, overall changes may not always reflect the direction of each analyst's individual adjustment to expectations.

Analysts who adjust their forecasts before the earnings report release may have access to the latest information or clues about the business conditions during the period being forecasted, potentially making their predictions more accurate than those who formed a consensus expectation. Zacks' Earnings ESP forecast model takes this factor into account, and some studies indicate that stocks with a positive Earnings ESP combined with Zacks Rank 1 (Strong Buy), 2 (Buy), or 3 (Hold) have produced positive surprises around 70% of the time.

For Bank of America, the "most accurate" recent expectations are below Zacks' consensus forecast, indicating that analysts have recently turned bearish on the company's profit outlook, resulting in an ESP earnings of -1.36%. On the other hand, the stock currently holds a Zacks Rank of 3.

Therefore, considering these factors, it is challenging to predict that Bank of America's earnings per share will exceed the general expectations.

So, can historical earnings surprises provide clues? When analysts calculate expectations for a company's future earnings, they often consider the extent to which the company has met past general expectations. In the second quarter financial report, the market expected Bank of America to have earnings per share of $0.79, while the actual earnings were $0.83, exceeding expectations by 5.06%. Over the past four quarters, the company has exceeded market expectations four times.

Furthermore, the level of earnings may not be the sole basis for stock price movements. Due to other disappointing factors, many stocks may still decline even if earnings exceed expectations. Similarly, unexpected catalysts have also helped some stocks rise when earnings fall short of expectations. Nevertheless, betting on stocks expected to exceed earnings expectations does increase the chances of success.

Comparing with peers in the same industry, another major player in the U.S. banking sector, JPMorgan Chase (JPM.US), is expected to have third-quarter revenue of $41.01 billion, a 2.9% increase year-on-year, and earnings per share of $4.02, a 7.2% decrease year-on-year The financial report data released last week showed that the bank's Q3 revenue was $42.65 billion, a year-on-year increase of 7.0%; earnings per share were $4.37, both exceeding market expectations.

Previously, Morgan Stanley's general expectations for earnings per share have been lowered by 1.1% to the current level in the past 30 days. However, the "most accurate" recent expectations are relatively higher, resulting in an earnings ESP of 0.39%, combined with Zacks' 3rd (hold) rating, thus predicting that the bank's earnings per share are very likely to exceed expectations. In addition, the company's earnings per share for the past four quarters have all exceeded market expectations