Having lost so much ground this year, some analysts were in support of investing on the dip, on the basis that the reputation of the big banks was tarnished beyond their actual value. Today, the investors who bit, the Oracle of Omaha, Warren Buffett among them, may be wondering if they made the right choice as financial stocks decline again today. The decision by analysts to cut quarterly profit expectations for Morgan Stanley (MS) and Goldman Sachs (GS), alongside extremely weak June jobs data, could drive big banks in to another round of harsh criticism.
Revenue trading from bonds, currencies and commodities are anticipated to have diminished by at least one third from the first quarter of the year prompting the analyst downgrade for both Goldman and Stanley. Goldman was especially hard hit by these reports, with 15 of 22 analysts providing quarterly coverage of the stock downgrading their second quarter EPS forecasts.
Morgan Stanley escaped only narrowly better with 12 of its 24 analysts slashing forecasts.
The reason behind Goldman’s broad downgrades is primarily related to the comparative earnings from last quarter. Goldman’s EPS is expected to average $2.89 this quarter against earnings of $4.38 in the first quarter, that number; however did not incorporate the weight of buying back a stake held by investor Warren Buffett which cut it down considerably.
The gripe toward Morgan Stanley relates more to their weakness from the year ago period. For the second quarter the company has been expected to produce 52 cents per share, compared to 50 cents in the quarter earlier and a considerably higher 80 cents a year ago. The consensus profit estimate for Morgan Stanley has now sunk to 45 cents a share for the quarter, 33 percent its levels at the end of March.
The negative expectation shook the confidence of some investors, with Morgan down almost 3 percent and Goldman declining more than one percent after the announcement.
Morgan and Goldman were not alone in their decline today. Citigroup (C), Bank of America (BOA), J.P Morgan (JPM) and American Express (AXP), all fell alongside the negative news. The negative economic news trumped American Express’s announcement today that it would be expanding its partnership with foursquare to the entire country after a successful pilot program. The partnership would encourage users to link an American Express account with their Fourswuare in order to benefit from special offers available only through the use of Amex. The move is a clear play to capitalize on the popularity of daily deals and social media. Not all social media plays are the right fit for every company so there’s no guarantee it could boost shares, which could explain the lack of investor enthusiasm.
That said, the decline of American Express in trading today is likely more related to the broader sinking financials. Employed as a litmus test of the greater economy and the health of banks, the most recent jobs data will likely keep these sunken shares down until the next wave of positive news arises. Nonfarm payrolls added 18,000 in June, widely missing economist expectations of 125,000. May job gains were also much lower than anticipated at only 25,000 on estimates of 54,000. The narrow increase in jobs is especially disconcerting at this time of year when considering that 18,000 is only one-tenth the amount needed to employ all the recent graduates entering the workforce.