The financial sector will begin releasing second quarter earnings later this week with major bank stocks scheduled to report on Friday. Bank stocks had gained substantially immediately after Donald Trump emerged victorious in the U.S. Presidential elections. But as the Trump trade sputters, the catalysts that spurred the rally initially look increasingly inadequate and may be unable to boost stocks and earnings in the near future.

However, it’s not all doom and gloom for bank stocks, with the rate environment poised to become more favorable. Additionally, prominent names from the industry have cleared stringent stress tests and received approval for their capital spending plans. In such circumstances, it makes sense to pick up those bank stocks which carry strong fundamentals and are poised to beat projections during the upcoming earnings season.

Revenue, Earnings Growth Seems Elusive

On Friday, banking heavyweights Citigroup Inc. (C - Free Report) , JPMorgan Chase & Co. (JPM - Free Report) and Wells Fargo & Company (WFC - Free Report) will kick off the second quarter earnings season for the sector. The finance sector, the largest chunk of whose earnings results come from banks, reported +10.5% earnings growth in 2017 Q1 on +5.2% higher revenues. This is expected to decline this time around with total Q2 earnings expected to be up +5.8% from the same period last year on +2% higher revenues.

The reasons for lackluster revenue growth are not hard to seek. Industrial and commercial lending continues to suffer from significant weakness. Additionally, mergers and acquisitions and capital market operations have failed to take off. Only advisory operations have somewhat made up for the failure to grow in other areas. When it comes to earnings, banks are left with few costs to reduce after years of squeezing operational expenses which had helped to lift bottom lines.

Fed Clearances, Rate Hikes to Boost Banks

There are several other challenges which banks have been facing for some time now. But some of them may soon become a thing of the past. For instance, a soft rate environment has continued to weigh on margins. Additionally, the gap between long and short term interest rates continues to decline.

But with the Fed determined to cut the size of its balance sheet and hike rates again this year, the rate environment could soon become more favorable. June’s record job additions should provide the central bank with enough faith in the economy to adopt an increasingly hawkish stance on the monetary front.

More importantly, banks have recently cleared stringent stress tests and received Fed approval for their capital spending plans. This was the first time that the Fed raised no objection to any of these plans ever since the tests were instituted in the aftermath of 2008 Great Recession. 

It could be argued that both these factors have already been accounted for, but it is likely that their impact is likely to be felt over the quarters to come. Additionally, June’s better than expected jobs report helped 30-year Treasury yields hit a six week high on July 7, another factor which is likely to boost banks.

Our Choices

At first glance, it may seem that the odds are stacked against the banking sector. For instance, there is still little clarity on the policy front with the Trump administration failing to make much headway on regulatory reform.

But the recent Fed stress test results, prospects of higher interest rates and rising treasury yields mean that several factors are still working in favor of the banking industry. Investing in banking stocks continues to remain a good option.

We have narrowed down our search based on a good Zacks Rank, positive Earnings ESP and other relevant metrics. Earnings ESP is our proprietary methodology for determining stocks which have the best chances to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

State Bank Financial Corp. (STBZ - Free Report) through its subsidiary provides community banking services to individuals and businesses in the middle Georgia and metropolitan Atlanta markets.

State Bank Financial’s projected growth for the current year is 13.9%. Its earnings estimate for the current year has improved by 1.6% over the last 30 days. The company is expected to report fourth quarter earnings on July 27 and has an Earnings ESP of 2.78%. The average quarterly EPS Surprise for the stock is 5% while the previous EPS surprise is 9.7%. The stock has a Zacks Rank #1. 

Wintrust Financial Corp. (WTFC - Free Report) is a bank holding company which provides banking services, trust and investment services, commercial insurance premium financing, short-term accounts receivable financing, and certain administrative services

Wintrust Financial has a Zacks Rank #2 (Buy) and its projected growth for the current year is 11.1%. Its earnings estimate for the current year has improved by 0.6% over the last 30 days. The company is expected to report fourth quarter earnings on July 18 and has an Earnings ESP of 1.02%. The average quarterly EPS Surprise for the stock is 5.3% while the previous EPS surprise is 9.9%.

Comerica Inc. (CMA - Free Report) is a banking and financial services company.

Comerica has a Zacks Rank #2 and its projected growth for the current year is 51.9%. Its earnings estimate for the current year has improved by 0.8% over the last 30 days. The company is expected to report fourth quarter earnings on July 18 and has an Earnings ESP of 4.67%. The average quarterly EPS Surprise for the stock is 8.7% while the previous EPS surprise is nearly 1%.

Synovus Financial Corp. (SNV - Free Report) is a diverse financial services company, which conducts its banking operations through Synovus Bank.

Synovus Financial has a Zacks Rank #2 and its projected growth for the current year is 22.5%. Its earnings estimate for the current year has improved by 0.4% over the last 30 days. The company is expected to report fourth quarter earnings on July 18 and has an Earnings ESP of 1.7%. The average quarterly EPS Surprise for the stock is 5.5% while the previous EPS surprise is 11.8%.