Bank stocks have lost some of their post-election sheen, with the industry lagging the S&P 500 index in the year-to-date period, particularly since the market’s March 1st peak.

The Zacks Major Banks industry, which includes all the money-center banks and big regionals like JPMorgan (JPM Quick QuoteJPM - Free Report) and PNC Financial (PNC Quick QuotePNC - Free Report) that kick-off the Q1 earnings season for the industry on Thursday April 13th, is up only +0.8% vs. the +5.2% gain for the S&P 500 index in that time period. JPMorgan shares are barely in positive territory this year (up +0.3%), effectively losing all of their +8.4% gain since the start of the year through March 1st. We should keep in mind however that bank stocks are still up big since election day, with the Zacks Major Banks industry up +23.6% since November 8th (JPM shares are up +22.5% in that same time period).

The recent pullback is solely a function of policy uncertainty out of Washington, with market participants tempering expectations for tax and regulatory reform in the wake of the healthcare standoff. This reaction likely makes sense. But we do want to point out that the overall backdrop for this industry remains very favorable, particularly given the Fed’s monetary policy stance. Treasury yields have been modestly trending lower lately, with the Syrian airstrikes and the mixed March jobs report likely adding to the trend a bit. But the market appears comfortable with the Fed’s rate hike outlook, which should keep the overall interest rate trend favorable for the banks.

It is primarily this interest rate development that has driving analysts to raise their estimates for bank stocks. These positive estimate revisions aren’t that notable for the March quarter, but they are significant for the second half of the year and next year.

The chart below shows the stock price performance of the Zacks Major Banks industry (dark blue line) and how aggregate annual earnings estimates for the space have evolved lately. The notable element in this chart is the evolving picture for 2018 estimates (the red line with an arrow above it). As you can see, estimates for 2017 have moved up as well, but the same for 2018 have notably turned around.

What Are Banks Expected to Report or Q1?

We will see if JPMorgan (JPM Quick QuoteJPM - Free Report) , Wells Fargo (WFC Quick QuoteWFC - Free Report) , and Citigroup (C Quick QuoteC - Free Report) will say anything about the policy questions when they report Q1 results this week (all reporting on April 13th), but they’ll likely reiterate the improved interest rate backdrop, heightened investor risk appetites and favorable outlook for the U.S. and global economy. March quarter estimates came down a bit for JPMorgan and Citigroup, but have remained relatively stable for Wells.

For the Finance sector as a whole, of which the Major Banks industry is the biggest earnings contributor, total Q1 earnings are expected to be up +5.4% from the same period last year on +2.9% higher revenues. This would follow +16.7% earnings growth in 2016 Q4 on +6.3% higher revenues.

The table below shows the sector’s Q1 earnings growth expectations at the medium-industry level contrasted with estimates for the following four quarters and actual results for the preceding three periods.

Please note that the Major Banks industry, of which JPMorgan, Wells Fargo and others are part, accounts for roughly 45% of the sector’s total earnings (insurance is the second biggest earnings contributor, accounting for about 25% of the total).

With earnings growth for the Major Banks industry expected to be just +0.2% for Q1, a strong showing from these big players will have a big impact on the entire sector. Better than expected results will likely prompt market participants to overlook the uncertainty out of Congress and acknowledge this industry’s improved outlook. In other words, these stocks can get their mojo back with better than expected results in the coming days.  

Expectations for Q1 As a Whole

Total Q1 earnings are expected to be up +6.5% from the same period last year on +6.3% higher revenues. This would follow +7.4% earnings growth in 2016 Q4 on +4.7%, the highest growth pace in all most two years.

Estimates for the quarter came down as the quarter unfolded, with the current +6.5% growth down from +10.4% at the end of December. The chart below shows how Q1 earnings growth expectations evolved over the last three months.

Please note that while Q1 estimates have followed well traversed path that we have been seeing consistently over the last few years, the magnitude of negative revisions compares favorably to other periods, particularly in the first half of last year and all of 2015. In other words, Q1 estimates have come down, but they haven’t come down by as much.

The table below shows the summary picture for Q1, contrasted with what was actually achieved in Q4.

Please note that the Q1 earnings season follows the strong showing on the earnings front in the preceding reporting cycle. Not only did 2016 Q4 growth reach the highest in two years, but total earnings for the quarter also reached a new quarterly record. The strong Q4 performance came after the first positive earnings growth in 2016 Q3, having declined in each of the preceding 5 quarters.

Expectations Beyond Q1

The chart below shows the Q1 earnings growth contrasted with what is expected in the following three quarters and actual results in the preceding 5 quarters. As you can see in the chart below, the growth pace is expected to ramp up in 2017.

You can see this improved earnings backdrop as the chart below of the S&P 500 relative to forward 12-month Zacks Consensus estimates shows.

Please note that the earnings backdrop has not changed in any meaningful way since the November elections, notwithstanding the market’s strong gains since then.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on Zacks.com and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview. He manages the Zacks Top 10 and Focus List portfolios and writes the Weekly Market Analysis article for Zacks Premium subscribers.

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Here is a list of the 21 companies including 6 S&P 500 members reporting this week.