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Time to Bet on Bank ETFs Before Earnings Release?

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Big banks will start releasing their quarterly numbers this week. Let’s delve into the earnings potential of the big six banking companies that could drive the performance of the sector ahead.

According to our methodology, a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) when combined with a positive Earnings ESP increases our chances of predicting an earnings beat, while companies with a Zacks Rank #4 or 5 (Sell rated) are best avoided. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Inside Our Surprise Prediction

Among the big six, JPMorgan Chase & Co. (JPM - Free Report) , Wells Fargo & Company (WFC - Free Report) and Citigroup Inc. (C - Free Report)  are likely to report on Jan 15.

JPM has a Zacks Rank #2 and Earnings ESP of +2.50%. This strengthens chances of an earnings beat.

WFC has a Zacks Rank #3 and an ESP of -2.66%. This makes surprise prediction difficult.

Citigroup has a Zacks Rank #3 and an ESP of +2.14%.

Bank of America Corporation (BAC - Free Report)  is expected to report on Jan 19. The stock has a Zacks Rank #3 and an ESP of +5.89%.

Goldman (GS - Free Report)  is about to report on Jan 19. It has a Zacks Rank #1 and an ESP of +3.14%.

On Jan 20, Morgan Stanley (MS - Free Report)  is likely to come up with its earnings release. Morgan Stanley has a Zacks Rank #3 (Hold) and an ESP of +8.55%.

What’s in Store This Earnings Season?

As discussed above, chances of a broad-based earnings beat are high. Analysts’ expectations for bank business conditions have improved as vaccine rollout boosted chances of faster-than-expected economic recovery. Fiscal stimulus has been another tailwind.

This has reflected in latest earnings estimates too, with Morgan Stanley’s current 2020 EPS estimate of $5.84 increasing from $5.70 two months back. The 2020 EPS expectation for Goldman has increased from $19.18 two months back to $20.04.

Bank of America’s 2020 expectation has also gone up from $1.77 to $1.81. The same holds good for Citi which saw 2020 EPS estimates going up from $4.26 to $4.34. JPMorgan has seen the earnings estimate rising from $7.45 to $7.80. Only Wells Fargo has seen the 2020 estimate coming down from 40 cents to 39 cents.

Hence, investors pinning hopes on an upbeat earnings season must be keen on knowing how financial ETFs like iShares U.S. Financial Services ETF (IYG - Free Report) , iShares US Financials ETF (IYF - Free Report) , Invesco KBW Bank ETF (KBWB - Free Report)  , Financial Select Sector SPDR (XLF - Free Report)  and Vanguard Financials ETF (VFH - Free Report)  are placed before their earnings releases. These funds have considerable exposure to the aforementioned stocks (see all Financial ETFs here).

Goldman has moderate exposure in the aforementioned ETFs. Rather, it is heavy on iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI - Free Report) .

Bottom Line

Investors should note that if the stock market rally continues, long-term bond yields will stage an ascent. Given a dovish Fed, a rise in long-term bond yields should work wonders for bank ETFs as this will widen banks’ net interest rate margin. So, whatever the earnings surprise is, investors can play these financial ETFs on the basis on yield curve movement (read: 4 Reasons for Bank ETFs to Win in 2021).

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