Market Insights

Earnings season has begun on a weak note as banks struggle and Netflix said its blistering growth will slow.

The four biggest U.S. lenders — JPMorgan Chase (JPM), Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC) — have issued quarterly results. JPM, C and BAC beat estimates, while WFC missed across the board.

They all sat near their lows as investors focused on the difficulties of lending money in the middle of an economic crisis. Future write-offs are one big issue, forcing the companies to set aside almost $27 billion against borrowers failing to make payments. Those provisions were up more than 40 percent from the first quarter.

Low interest rates are the other problem, reducing their ability to generate income on assets. The securities business, which includes investment banking and trading, did much better after volatility drove a surge of market activity. JPM and C benefited from that trend, along with Goldman Sachs (GS) and Morgan Stanley (MS).

However, the broader recessionary environment remains difficult for the sector. So far, almost all the banks remain at least 30 percent below their old highs. The situation may not change much until the economy improves.

Netflix: ‘We Expect Less Growth’

Netflix (NFLX) has been an investor favorite as the pandemic drove record usage of its streaming videos. But now the tech darling (the “N” in “FANG”) sees the boom slowing. The stock flew 21 percent in the month before the report, but fell more than 8 percent in extended hours yesterday.

“We saw significant pull-forward of our underlying adoption leading to huge growth in the first half of this year,” executives said in their quarterly letter yesterday afternoon. “We expect less growth for the second half.”

NFLX sees just 2.5 million new users in the current quarter, down from 10 million between April and June. That backward-looking number also missed some highly optimistic estimates. Earnings also missed the mark, although investors usually look toward the future with growth stocks like NFLX.

Domino’s Pizza (DPZ) has also benefited from coronavirus thanks strong delivery demand. Same-store sales popped 16 percent, versus estimates for just 12 percent. Earnings and revenue both beat estimates as the company expanded its footprint by more than 5 percent.

Delta Airlines, UnitedHealth

Two other noteworthy companies reported last week: Delta Airlines (DAL) and UnitedHealth (UNH). Neither moved much.

DAL reported a massive $3.9 billion loss after revenue plunged 88 percent. Grounded flights caused the airline to burn more than $40 million per day in the quarter.

Airlines are similar to banks because travel is so intertwined with the economy. Investors view them as “reopening plays” that will benefit from the pandemic ending. Otherwise, they’ll struggle to cover fixed costs.

UNH, on the other hand, is making more money than ever after coronavirus kept patients from the doctor. The health insurer paid just 70 percent of premiums in claims, down from 83 percent a year before. (This is known as “MLR,” or medical loss ratio.)

Analysts at firms like RBC Capital, Raymond James, Credit Suisse and Citigroup raised their price targets. Still, UNH missed on revenue after mass layoffs in the economy reduced some of its business.

In conclusion, coronavirus remains the dominant story as second-quarter earnings season begins. The pandemic has helped some companies. But others, like banks and airlines this week, continue to struggle.