Headline earnings improved markedly last week and are well above estimates at the end of the quarter, but they will still show year-over-year declines. Another Fed rate hike and the possible seizure of First Republic Bank make forward guidance from companies even more crucial.

The seemingly imminent seizure of First Republic Bank and increased usage in the Federal Reserve’s bank support facilities shows that the banking crisis continues to smolder. It will be crucial to watch post-tax season bank deposits and the Fed facilities next week.

Headline earnings improved last week and are above estimates at the end of the quarter. Markets will be particularly sensitive to forward guidance. This week is the busiest of the earnings season, so we will have a better feeling for earnings across all sectors by the time it ends.

Banks had deposit outflows, likely related to tax season. Based on the 2022 tax season, more deposit outflows will be seen next week. Perhaps a bit more worrisome is the slight increase in usage of Fed bank facilities, as the tax-related withdrawals could be increasing pressure on some banks again.

This week, a more diverse group of companies beyond the banks reports earnings. In addition, the smaller banks will be of particular interest since early large bank results indicate that large banks might benefit at the expense of small. Markets will be particularly sensitive to forward guidance.

Lifted by supportive forward earnings guidance, large bank stocks outperformed for the first time since the banking crisis began. Notably, small and large banks had deposit inflows. Loans from smaller banks have contracted for three straight weeks, but the decline this week was smaller.

Reporting season begins this week with a focus on the banks. Given the unsettled economy, the banking crisis, and consensus estimates pricing in positive earnings growth in the back half of the year, forward guidance from companies will be essential. Earnings are forecasted to decline by -6.6%.

While the U.S. banking system has stabilized from the extremes of the crisis, the real economic impacts are beginning to be seen. Loans from smaller banks have contracted for two straight weeks, and commercial real estate credit is likely to be most severely impacted.

The U.S. banking system continued stabilizing from the extremes of the crisis. While there are signs, like CDS prices, that confidence is returning in the banking system, the cash sorting activity and elevated uncertainty leave the door open to a return of anxiety about additional bank failures.