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Q1 Earnings Kick Off: Can Big Banks Reignite Sagging Rally In The Space?


The financial space, which capitalized on President Donald Trump's election, banking on his promise of deregulation, has had a lukewarm first quarter. The Financial Select Sector SPDR Fund (NYSE: XLF) is up merely 0.9 percent compared to a 5.29 percent advance by the S&P 500.

However, since Nov. 8, XLF has outperformed the S&P 500 Index, with the former gaining 17.36 percent compared to the latter's 10.17 percent. Taking out March's pullback from the equation, the gain of the XLF is an impressive 26 percent. In March alone, the XLF was down 7.05 percent, faring worse than the S&P 500 Index, which was down about 1.62 percent.

XLF Chart
Source: Y Charts

Positive Q1 Earnings Expectations

Data released by Factset showed that S&P 500 earnings are likely to grow 8.9 percent in the first quarter, marking the highest rate since the fourth quarter of 2013, which saw a similar growth rate. Factset expects the Financials sector to report the highest year-over-year earnings growth of all eleven sectors at 14.3 percent.

The firm expects four of the five industries among the financials to report double-digit earnings growth.

  • Diversified Financial Services: 56 percent.
  • Capital Markets: 26 percent.
  • Insurance: 13 percent.
  • Banks: 10 percent.

Among individual companies, Bank of America Corp (NYSE: BAC) and Goldman Sachs Group Inc (NYSE: GS) are projected to be the largest contributors to earnings growth for this sector. Factset's mean first quarter earnings per share estimate for Bank of America is $0.35, compared to year-ago number of $0.21. The mean estimate for Goldman Sachs is $5.26, compared to year-ago earnings per share of $2.68.

Rally Reflecting Hopes Of Regulatory Overhaul?

However, some analysts feel there is a disconnect between the run-up seen since Nov. 8 and the fundamentals. The positive showing by the financial stocks are attributed mostly to Trump's pledge that he would dismantle the Dodd-Frank Act, which he perceives as hindering growth despite the banks being highly capitalized. For sure, the upward adjustment of the fed funds rate by the Federal Reserve augurs well for these banks, as higher interest rate could boost the net interest margins. Capital market activity was also conducive, with equity markets on a tear since the presidential election.

Key Earnings Date; Earnings; Revenue Expectations

  • Wells Fargo & Co (NYSE: WFC): 5 a.m. ET Friday; $0.97 (down 2.02 percent); $22.31 billion (up 0.50 percent).
  • Citigroup Inc (NYSE: C): Before the market open on Friday; $1.24 (up 13 percent); $17.83 billion (up 1.60 percent).
  • JPMorgan Chase & Co. (NYSE: JPM): Before the markets open Friday; $1.52 (up 13 percent); $24.88 billion (up 3.30 percent).
  • Morgan Stanley (NYSE: MS): Before the markets open on April 17; $0.88 (up 60 percent); $9.29 billion (up 19.20 percent).
  • Bank of America: Before the market open on April 18; $0.35/share (up 25 percent); $21.67 billion (up 9.9 percent).
  • Goldman Sachs: Before the market open on April 18; $5.17 (up 93 percent); $8.53 billion (up 34.50 percent).

Related Links:

This Algo Is Bullish On Banks And Tech

The Trump Rally Is Overshadowing The Best Earnings Season In Years