EC Can Earnings Reports Push Bank Stocks Higher?

Bank stocks have been enthusiastic participants in the post-Christmas bounce in the market, but they remained a weak part of the market overall last year. The chart below shows the stock market performance of the Zacks Major Banks industry, which includes the space’s leading players, relative to the S&P 500 index in 2018.

Citigroup (C) kicks off the Q4 earnings season for the group on Monday, with JPMorgan (JPM) and Wells Fargo (WFC) following it on Tuesday, January 15. A host of industry players, including Goldman Sachs (GS), Morgan Stanley (MS), a number of the regional players and asset managers are also on deck to come out with results this week. In all, we will get Q4 results from more than 60 companies this week, including 34 S&P 500 members.

The question is whether these quarterly results can serve as a catalyst for bank stocks?

To answer that question, we need to keep in mind that the issue with these stocks was not a lack of operating performance, but rather big-picture uncertainty. On most key operating metrics, bank performance has been very strong in the first three quarters of the year and most of those favorable trends will show up in the Q4 results as well.

Key parts of the market’s worry list for banks include the flattening yield curve and potential for inversion that has implications for the economy’s health beyond 2019. The Fed’s openness to change its tune in recent days is essentially an acknowledgment of the same late-cycle narrative. Keep in mind that banks are cyclical businesses engaged in lending and other activities like investment banking, money management, and trading that are always at the mercy of the economic cycle. Banks not only experience low demand for its services when the economic cycle turns down, but the quality of its existing assets (its loan portfolio) also goes down as its customers’ credit profiles weaken.

Even if we put aside the market’s other worries like trade uncertainty, global growth and political issues, it is this late-cycle worry that has been the big weight on sentiment on bank stocks. That said, it is reasonable to expect that with valuations this compressed already, strong results will give many of these stocks a short-term bump. But a fundamental rerating may be not be possible till the big-picture worries are put to rest.

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Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on and in the print and electronic media. His ...

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