Despite mostly positive earnings reports out of six of the largest American banks, financial stocks have slumped since big banks
earnings
season started last Friday. Bank of America Corp (NYSE: BAC), Citigroup Inc (NYSE: C), Morgan Stanley (NYSE: MS), Goldman Sachs Group Inc (NYSE: GS) and JPMorgan Chase & Co. (NYSE: JPM) all reported Q4 earnings beats, while
Wells Fargo & Co (NYSE: WFC) came up 4 cents
short of consensus EPS estimates.
Unfortunately, the solid numbers haven’t translated to positive share price momentum for investors. Since last Friday, the
Financial Select Sector SPDR Fund (NYSE: XLF)
is down 2.0 percent, and all six banks stocks mentioned above are down between 2.6 and 4.0 percent.
Delving Into The Selloff
While the selloff is likely disappointing for shareholders, it shouldn’t be particularly surprising. Bank stocks have been
red-hot in recent months. Each of the six U.S. mega-banks is up between 18 and 40 percent since mid-October.
In addition, earnings historically don’t have too much correlation with bank share prices. Looking back at the previous five
quarters, the six companies mentioned above beat consensus Street EPS numbers in 25 out of 30 collective quarters. In the week
following those 25 earnings beats, the banks generated an average return of +0.97 percent. In the week following the five earnings
misses, the banks generated an average return of +0.92.
Surprisingly, the better bank earnings are, the worse share prices have performed in recent history. In two out of the last five
quarters, all six of the big bank stocks
beat earnings estimates. In those two quarters, bank stocks generated an average one-week return of -1.39 percent.
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