Citigroup's Earnings Miss Undoes S&P 500 Earnings Growth in Q4

Author’s Note: In last week’s report (this article), we noted that the blended earnings growth rate for the S&P 500 for Q4 had dropped to -0.2% from 10.0% during the week. We stated that the decline in earnings growth was mainly due to the large negative earnings surprise reported by Citigroup, due to the inclusion of charges related to the recently passed tax law in the actual EPS number reported by the company. Upon reviewing notes from analysts after the earnings release for Citigroup, FactSet determined that the majority of analysts were excluding the tax law charges from their EPS estimates for the company.  As a result, the actual EPS number for Citigroup was recently changed from -$7.15 (including the tax law charges and expenses) to $1.28 (excluding the tax law charges and expenses). FactSet is in the process of reviewing (and revising as needed) the actual EPS numbers of other companies in the Financials sector that reported substantial positive or negative earnings surprises due to charges or gains associated with the tax law.

As a result of these changes, the blended earnings growth rate for the Financials sector for Q4 last Friday was 13.2% (not -57.1% as published last week), and the blended earnings growth rate for the S&P 500 was 11.7% (not -0.2% as published last week). These growth rate numbers will be the growth rate numbers for last week referenced in the remainder of today’s report (article).

During the past week, the blended earnings growth rate for the S&P 500 for Q4 declined by more than 10 percentage points (from 10.0% on January 12 to -0.2% on January 19). In aggregate, dollar-level earnings for the S&P 500 decreased by $28.4 billion during this time. 

At the sector level, the Financials sector accounted for the entire decline in S&P 500 earnings during the past week, as earnings for this sector dropped by $29.2 billion over this period. Within the Financials sector, Citigroup witnessed the largest dollar-level decline in earnings of any company in the sector (and the index) over the past week. 

Since January 12, earnings for Citigroup have dropped by $21.3 billion, which is 73% of the total $29.2 billion decline for the Financials sector.

What's Behind the Sharp Decline In Earnings for Citigroup? 

On January 16,  Citigroup announced actual earnings for the fourth quarter that were substantially below the expectations of analysts. Citigroup reported actual EPS of -$7.15, compared to the mean EPS estimate of $0.56. The actual EPS of -$7.15 “included an estimated one-time, non-cash charge of $22 billion, or $8.43 per share, recorded in the tax line within Corporate/Other, related to the enactment of the Tax Cuts and Jobs Act (Tax Reform)." Prior to the earnings release, many analysts had not updated their EPS estimates to reflect the impact of the charge. However, since the majority of analysts covering Citigroup provide EPS estimates to FactSet on a GAAP basis, the tax charge was included in the actual EPS for comparison. If Citigroup alone was excluded, the earnings growth rate for the S&P 500 would improve to 7.9% from -0.2%.

Other companies have contributed to the decline in earnings for the Financials sector by reporting negative earnings surprises due to charges or expenses related to the tax law, including American Express (-$1.41 vs. $1.55), Goldman Sachs (-$5.51 vs. $4.92), Bank of America ($0.20 vs. $0.45), and JPMorgan Chase ($1.07 vs. $1.69).  If the entire Financials sector were excluded, the earnings growth rate for the S&P 500 would improve to 11.2% from -0.2%.

While fourth quarter earnings have declined over the past few weeks due to the negative earnings surprises reported by companies in the Financials sector, earnings expectations for CY 2018 have increased over the same time frame due to a combination of a falling base for 2017 and rising estimates for 2018.  Since December 31, the expected earnings growth rate for the S&P 500 for 2018 has increased from 12.3% to 18.6%.

For more, download the complete Earning Insight report.