Earnings season hits US stocks: "Tough times"? This week, the entire market closely watches banking stocks.

Under the wave of artificial intelligence, the cumulative increase of the S&P 500 index has exceeded 17% so far this year. However, a survey shows that due to listed companies issuing profit warnings and investors' concerns about rising interest rates, the S&P 500 index may face difficulties in the near future.

With the heavyweight US earnings season approaching, the banking industry will take the lead, and the entire market will closely watch the latest performance of large US banks this week.

For the US stock market, the earnings season may be negative

According to the latest Markets Live Pulse survey, among 346 respondents, 55% of them believe that the upcoming earnings season will be unfavorable for the US stock market.

Sophie Lund-Yates, Chief Equity Analyst at Hargreaves Lansdown, said that the negative noise during the earnings season will definitely be a factor driving the slowdown of the US market, especially when economic indicators indicate that there will be further interest rate hikes in the future.

In fact, recession fears are spreading in the market, inflation remains high, and the Federal Reserve has to maintain a tough stance. 42% of the respondents believe that the biggest negative impact of the US stock market during the earnings season will be the further tightening of the financial environment. After the non-farm payroll report was released last Friday, investors still have high expectations for a 25 basis point interest rate hike by the Federal Reserve in July. The Federal Reserve has also hinted at the possibility of two more interest rate hikes this year.

At the same time, 48% of the survey participants believe that the decline in earnings per share of S&P 500 index constituent companies will stop after Q3.

However, Peter Garnry, Head of Equity Strategy at Saxo Bank, said, "If companies fail to meet expectations in Q3 and Q4, the US stock market may be particularly vulnerable due to the continuous rise in stock market valuations this year."

Pressure on Q2 earnings of the banking industry, loan losses may reach the highest increase since the pandemic, can bank stocks still be promising?

The Q2 earnings season for the US stock market kicked off this week, and the six major US banks will release their Q2 results one after another in the next half month.

JPMorgan Chase, Citigroup, and Wells Fargo will officially announce their earnings on July 14, sounding the horn for the Q2 earnings season of the US stock market; Bank of America and Morgan Stanley will announce their earnings on July 18; Goldman Sachs will announce its earnings on July 19.

According to the Markets Live Pulse survey, about 53% of the respondents expect the earnings of large US banks to be disappointing, and this earnings season will confirm the deterioration of the banking industry's prospects, which may drag down bank stocks.

It is worth mentioning that another analysis shows that loan losses of large US banks in Q2 may reach the highest increase since the pandemic.

According to data compiled by Bloomberg, analysts' average forecast shows that the six major US banks will write off a total of $5 billion in defaulted loans in Q2 this year. Analysts estimate that these six banks will set aside an additional $7.6 billion to cover potential bad loans.

Both of these figures are nearly double those of the same period last year. However, they still fall short of the blow that major banks suffered at the onset of the pandemic, when write-offs and provisions reached peak values of $6 billion and $35 billion, respectively.

Among all types of loans, credit card loans are the biggest source of pain for many banks. Analysts estimate that JPMorgan Chase's write-offs for credit card loans this quarter will total $1.1 billion, higher than the $600 million in the same period last year. As for Bank of America, credit card loans account for about a quarter of its write-offs.

JPMorgan Chase will be one of the first companies to announce its earnings this Friday, and it is expected to report the largest year-on-year increase in loan losses.

Analysts predict that JPMorgan Chase's Q2 write-offs and new provisions will amount to $3.8 billion, a 120% increase from the $1.8 billion reported in the same period last year.

In addition, the combined loan losses of Wells Fargo and Bank of America are expected to more than double this quarter, while Goldman Sachs' loan losses will increase by 70%, and Morgan Stanley and Citigroup's loan losses will increase by 60%.

CFRA banking analyst Kenneth Leon predicts that Bank of America, Citigroup, and JPMorgan Chase will also increase their reserves to cover potential losses in commercial real estate this quarter.

Despite concerns in the banking industry's earnings reports, some analysts believe that overall, given their significantly reduced valuations, bank stocks remain a good choice.

The S&P Bank ETF has fallen 21% this year, with a price-to-earnings ratio of 7.7, less than half of Janus Henderson's price-to-earnings ratio. FactSet data shows that profit expectations for the banking industry have declined by 16% in the past six months, reflecting analysts' concerns about reduced loan volumes and trading activity. Furthermore, most of the pessimism caused by the banking crisis in March has already been absorbed, and the performance of large US banks still has the potential to boost the entire sector.

In response, Thomas Hayes, the founder of investment bank Great Hill Capital, stated, "We do believe that banks will receive the highest valuation in the second half of the year."