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How Will Bank ETFs Fare This Earnings Season?

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Big banks will start releasing their quarterly numbers this week. The outlook is pretty bullish this time thanks to economic improvement and rise in yields. 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 Goldman (GS - Free Report) are likely to report on Apr 14.

Goldman has a Zacks Rank #1 and an ESP of +3.83%. This strengthens the chances of an earnings beat.

JPM has a Zacks Rank #3 and Earnings ESP of +0.33%.

WFC has a Zacks Rank #3 and an ESP of +5.32%.

Citigroup Inc. (C - Free Report)  and Bank of America Corporation (BAC - Free Report) are expected to report on Apr 15.

Citigroup has a Zacks Rank #3 and Earnings ESP of +4.48%.

Bank of America Corporation has a Zacks Rank #3 and an ESP of +0.49%.

On Apr 16, Morgan Stanley (MS - Free Report) is likely to come up with its earnings release. Morgan Stanley has a Zacks Rank #2 (Buy) and an ESP of 0.00%.

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 a faster-than-expected economic recovery. Fiscal stimulus has been another tailwind.

This has reflected in the latest earnings estimates too, with Morgan Stanley’s current quarter EPS estimate of $1.72 increasing from $1.67 seven days back. The stock has witnessed consistent upward earnings estimate revisions in the past 30-, 60-, 90-day periods (when it was as low as $1.37). In fact, most of the big banks saw their earnings estimates going up in the past 7-,30-,60-,90-day-periods.

The current-quarter EPS expectation for Goldman has increased from $9.14 a week ago to $9.52 now. Three months back, the estimate was $6.56. Bank of America’s current-quarter expectation has also gone up from 53 to 65 cents in the past three months.

The same holds good for Citi, which saw the current-quarter EPS estimates going up from $1.86 to $2.40 in the past three months. JPMorgan has seen the current-quarter earnings estimate rising from $2.49 to $3.01. Wells Fargo has seen the current-quarter estimate rising from 54 cents to 68 cents in the past three-month period.

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.

Bottom Line

Investors should note that if the stock market rally continues, long-term bond yields will likely stage an ascent, albeit at a moderate space, given the global surge in COVID-19 cases.

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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