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How Will Bank ETFs Perform in Light of Q4 Earnings?

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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 a rise in bond 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) , Citigroup Inc. (C - Free Report) are likely to report on Jan 14.

JPM has a Zacks Rank #3 and Earnings ESP of negative 1.87%.

WFC has a Zacks Rank #2 and an ESP of negative 1.91%.

C has a Zacks Rank #3 and an ESP of negative 5.22%.

On Jan 18, Goldman (GS - Free Report) is likely to come up with its earnings release. Goldman has a Zacks Rank #2 and an ESP of 0.00%.

Bank of America Corporation (BAC - Free Report) is expected to report on Jan 19. BAC has a Zacks Rank #3 and Earnings ESP of negative 0.66%.

Morgan Stanley (MS - Free Report) too is likely to report on Jan 19. MS has a Zacks Rank #2 and Earnings ESP of 0.00%.

Are Negative ESPs At All a Threat to Financial ETFs?

As discussed above, chances of a broad-based earnings beat are low-to-moderate as most stocks are experiencing a negative ESP.

However, despite negative ESPs we believe financial stocks and ETFs are up for a rally in the coming days as rates are rising on a hawkish Fed. The U.S. central bank has already paced up QE tapering. The central bank plans to buy $60 billion per month of bonds in combined Treasuries and agency mortgage-backed securities starting in January, down from $90 billion in December and 120 billion from the start of the pandemic through November.

Plus, the bank upped its economic growth projections, raised its inflation outlook and cut unemployment rate projections. Chances are high that the Fed will enact a rate hike in its March meeting. As much as 93% of economists see the Fed hiking rates more than once in 2022 (read: ETFs to Win or Lose on Hawkish Fed Minutes).

Banks are beneficiaries of rising rates. As banks seek to borrow money at short-term rates and lend at long-term rates, a steepening yield curve earns more on lending and pays less on deposits, thereby leading to a wider spread. This expands net margins and increases banks’ profits (read: 7 ETF Predictions for 2022).

Analysts’ expectations for bank business conditions have improved as Covid-19 vaccination and chances of more antiviral treatment boosted chances of a faster-than-expected economic recovery. So, whatever the earnings surprise is, investors can play these financial ETFs on the basis of yield curve movement.

Hence, investors pinning hopes on a bank rally must be keen on knowing how financial ETFs like iShares U.S. Financial Services ETF (IYG), iShares US Financials ETF (IYF), Invesco KBW Bank ETF (KBWB), Financial Select Sector SPDR (XLF - Free Report) and Vanguard Financials ETF (VFH) are placed before their earnings releases. These funds have considerable exposure to the aforementioned stocks. These ETFs are up 1.1%, 1.9%, 4.5%, 2.0% and 1.8% past week.

Goldman has moderate exposure in the aforementioned ETFs. It is heavy on iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI - Free Report) . IAI is up 1% past week. All these gains were realized amid a backdrop of a 0.3% gains in SPDR S&P 500 ETF Trust (SPY - Free Report) .

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