The market spotlight shines brightly on US banking heavyweights Bank of America (BofA) and Goldman Sachs (GS) as they release their fourth-quarter earnings before US markets open on Tuesday.

Since the start of 2021, shares from boths banks have performed well with BofA up almost 9% while GS gaining over 14%. However, this does not necessarily mean that Q4 earnings may smash expectations.

As highlighted in our JPMorgan preview last week, banking stocks continue to derive strength from progress on the vaccine front and renewed hopes over global economic growth.

Bank of America – major challenges

Investors will be closely watching how well Bank of America handles two major challenges when it publishes its Q4 2020 earnings. It is widely known that the negative impacts of COVID-19 and low-interest rates environment punished many major banks including BofA.

The multinational investment bank has seen revenues fall for four consecutive quarters with markets expecting a similar story in Q4.

According to Bloomberg, the consensus earnings per share estimates stand around 55c per share on $20.51 billion in revenues. For a full year, earnings are projected to decline by 36.6% to $1.79, while full-year revenues are forecast to hit $86.28 billion – marking a 5.7% decline from 2019.

What to watch out for….

It’s all about the loan loss provisions and trading revenues.

The loan loss provisions may be defined as the portion of loan repayments set aside by banks to cover the portions of the loss on defaulted loan repayments.

Investors are likely to keep an eye out for whether BofA was forced to top its loan loss provision in Q4 in the face of COVID-19. If this is indeed the case, sentiment towards the bank is likely to take a hit.

In regards to trading revenues, the explosive levels of volatility in 2020 dished out extraordinary opportunities for banks to boost revenue.  The jump in trading profits slightly soothed the negative impacts of low-interest rates. Given how volatility remains the name of the game and equity markets are flirting near record highs, BofA may report impressive trading revenue. According to Bloomberg Consensus, trading revenue is expected to hit $3.14 billion in Q4.

BofA bulls still in the building

Share prices remain bullish on the daily charts as there have been consistently higher highs and higher lows. The solid weekly close above $31.50 may invite an incline towards $35.50 and possibly higher. Lagging indicators in the form of the MACD and 20 Simple Moving Average points to higher prices. Should shares sink below $29.50, this technical bullish setup becomes invalidated.

Will Goldman Sachs surprise markets?

Investors will also be closely scrutinizing Goldman’s earnings report for insight and clarity into the banks’ outlook for 2021. Adjusted earning per share estimates stand around $7.31  with net revenues seen hitting $9.94 billion. Interestingly, full-year earnings per share are forecast to dip 13% to $20.56 while revenues for the whole of 2020 are projected to rise 17% to hit $42.746 billion.

Buying sentiment towards Goldman Sach shares may receive a boost should earnings meet or exceed expectations.

Given how the bank’s stock is flirting near record highs, positive earnings could provide bulls the green light to elevate prices to fresh records beyond $309.40.