U.S. Banks Set To Kick Off Earnings Season

Banks are among the first to kick off the upcoming U.S. earnings season. Several of the largest U.S. banks are reporting on Jan. 15, including Citigroup (C), Wells Fargo (WFC) and JPMorgan Chase & Co (JPM).

Along with most of the financial sector, banks were among the hardest hit during the COVID-19-induced bear market. However, many have recently regained some favor – with price performance outpacing even some of the most popular tech sector stocks in recent weeks, as can be seen in Exhibit 1 below. By contrast, the tech-heavy Nasdaq 100 (NDX) has been essentially flat over this four-week period.

Exhibit 1 shows the largest U.S. banks, with market caps that exceed $10 billion. Over the last four weeks, their prices have appreciated between 9.9% and 25.1%. While some are still down over the last 52 weeks, most notably Wells Fargo and Citigroup, this 52-week Price PCT Change column is looking considerably better than it did just a short while ago.

Exhibit 1: Price Percentage Change over Four- and 52-week Time Periods

Source: Refinitiv Eikon

It’s hard to know for sure what’s changed investor sentiment toward banks. It could be we’re witnessing a rotation from growth to value stocks. It could be a “reflation trade” with Democrats taking both the White House and eliminating the Senate Republican majority. Or, it could be a positive change in fundamentals and/or economic conditions.

Using traditional relative valuation ratios, banks have long been among the cheapest stocks. In fact, their unpopularity contributed to the massive underperformance of value factors, indices and funds, relative to their growth counterparts, over the last few years.

A fundamental change may be contributing to the recent interest in bank stocks. Exhibit 2 shows a sharp steepening of the yield curve. While short-term maturities remain near zero, yields at 5, 10, 20 and 30 years are considerable higher, relative to short-term maturities, than they were one year and two years ago.

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