by Esha Dey and Georgie McKay
As the biggest US banks kick off earnings season this week, strategists say Wall Street’s subdued profit expectations are setting the stage for lenders to continue their sizzling run in the stock market.
The group has been on a roll, with the KBW Bank Index — which includes 24 lenders, among them JPMorgan Chase & Co. and Citigroup Inc. — up 37% from its April low and hovering near a record. That’s more than the broad S&P 500 Index’s advance and better than even the tech-heavy Nasdaq 100 Index, which has gained around 31% in the same period.
Yet investors may still be undervaluing the sector, leaving the door open to more gains if profits come in strong. While financials are expected to account for 18.6% of the overall earnings in the S&P 500, they only have a 13.7% weighting in the index, a gap that exceeds its 15-year average, according to a report from Bloomberg Intelligence strategists Gina Martin Adams and Michael Casper. Analysts on average expect earnings for the S&P 500 Financials Index to fall about 1% in the second quarter, BI data showed.
“Investors appear to have baked little hype into financials’ earnings,” BI’s Casper said. That leaves “room for a fair number of surprises to sustain the sector’s rally.”
Several marquee names are reporting this week, with results from JPMorgan, Citigroup and Wells Fargo & Co. kicking off earnings season on Tuesday. Goldman Sachs Group Inc, Morgan Stanley and Bank of America Corp. report later in the week.
Strategists see plenty of tailwinds for the sector, such as the possibility of lighter regulatory restrictions during President Donald Trump’s administration and expectations for more mergers and acquisitions. With the Federal Reserve’s stress tests from earlier this month now in the rearview mirror, many expect lenders will be able to provide updates on share buyback plans and the extra capital they plan to hold above regulatory requirements.
“The banking industry is at the precipice of a materially positive shift in the regulatory environment,” KBW analyst Christopher McGratty wrote last week. Major banks like JPMorgan, Bank of America, Wells Fargo, Morgan Stanley, Goldman Sachs and Citi are set to be the biggest beneficiaries from deregulation, he said.
At the same time, a possible watering down of the Basel 3 international capital bank rules can also provide an impetus for share buybacks, McGratty said.
Many also predict trading revenue increases for the biggest US banks, largely due to record trading days for some firms in the aftermath of Trump’s “Liberation Day” tariff announcements in April.
Of course, there are reasons for caution, among them the sector’s rising valuation. The S&P 500 financials gauge is currently trading at just over 17 times its forward 12-months earnings, compared to a 10-year average of about 14.
Risks to the group include uncertainty over how the trade war might affect banks’ earnings, a lack of clarity on the Fed’s path toward lowering interest rates and lingering doubts about the health of the consumer. HSBC earlier this month downgraded JPMorgan Chase, Goldman Sachs and Bank of America, citing “downside risks associated with macro-uncertainty.”
But Mike Mayo, the Wells Fargo analyst who early last year correctly predicted a big rally in the then-beleaguered sector, said deregulation and earnings growth are likely to fuel further gains in financials.
“We don’t think the stocks are pricing in the full benefits,” he said.
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