EC Previewing Bank Earnings

Bank stocks enthusiastically participated in the post-Christmas rally, but they lost steam in mid-March as Treasury yields pulled back again and have recovered only about half of losses since then. The chart below shows the 6-month stock market performance of the Zacks Major Banks industry, which includes the space’s leading players, relative to the S&P 500 index.

JPMorgan (JPM) and Wells Fargo (WFC) kick off the Q1 earnings season for the group on Friday, April 12, with a host of industry players following suit the following week. In all, we will get Q4 results from more than 20 companies this week, including 6 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 has not been a lack of operating performance, but rather big-picture uncertainty. On most key operating metrics, bank performance was been very strong in recent quarters and we will most likely see a repeat performance this earnings season 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 recent change in the Fed’s monetary policy stance 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 keep 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 regularly provides earnings analysis on Zacks.com and appears frequently in the print and electronic media. In addition to this Earnings Preview article, he publishes the  more

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