EC Can Earnings Reports Push Bank Stocks Even Higher?

The large money-center banks that will kick off the December-quarter earnings season for the sector this week have been standout stock market performers lately.

The Zacks Major Banks industry, which includes JPMorgan (JPM), Bank of America (BAC), Citigroup (C) and others that are on deck to report results, enjoyed a +28.7% gain over the past year, outperforming the broader market. As you can see in the chart below, JPMorgan and Bank of America have done even better.

The 2019 outperformance follows the group’s dismal showing the year before when it lagged the broader market by a big margin.

The biggest factor driving the group’s rebound in 2019 was Fed policy and its impact on the yield curve. Other macro and industry-specific factors likely played roles as well, but the clear indication from the central bank of pausing its easing move and the market expectation that this stance will remain in place through 2020 has been key pushing this group higher.

While the margin pressure has been a function of Fed policy, the group has otherwise been well placed all along, with a stable and moderately growing U.S. economy driving decent loan growth. The combination of fee growth and cost controls has been helping profitability, with active share buybacks adding to the per share earnings.

On top of all of this has been an attractive valuation picture for the group, in our view, that still remains favorable despite the 2019 gains, as the chart below shows.

This chart is showing the Zacks Major Banks Industry relative to the S&P 500 index on a forward 12-month P/E basis. The group is currently trading at 63% of the S&P 500 index, up from 58% at the end of August 2019, but still below the long-term median of 72%.

What Are Banks Expected to Earn?

Total Q4 earnings for the Zacks Major Banks industry that includes JPMorgan, Wells Fargo and other major industry players are expected to be down -9.6% from the same period last year on +1.4% higher revenues. The decline is primarily a function of tough comparisons at Bank of America and Wells Fargo, with the year-earlier tally reflecting a one-time boost from the tax cut legislation.

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