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Big banks will start releasing their quarterly numbers this week. The outlook is moderate this time, thanks to the regional banking crisis emanating in March 2023 and investors shifting deposits to big banks. 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 banks, JPMorgan Chase & Co. (JPM - Free Report) , Wells Fargo & Company (WFC - Free Report) , Citigroup Inc. (C - Free Report) are likely to report on Apr 14.
JPM has a Zacks Rank #3 and an Earnings ESP of -0.77%.
WFC has a Zacks Rank #3 and an Earnings ESP of +7.24%.
C has a Zacks Rank #3 and an Earnings ESP of +0.12%.
On Apr 18, GoldmanSachs (GS - Free Report) is likely to come up with its earnings release. Goldman has a Zacks Rank #3 and an Earnings ESP of +0.07%.
Bank of America Corporation (BAC - Free Report) is expected to report on Jan 18. BAC has a Zacks Rank #4 and an Earnings ESP of -3.36%.
Morgan Stanley (MS - Free Report) , too, is likely to report on Apr 19. MS has a Zacks Rank #3 and an Earnings ESP of -1.35%.
Are a Few Negative ESPs At All a Threat to Financial ETFs?
As discussed above, the chances of a broad-based earnings beat are moderate as most stocks currently have a positive ESP while a few have negative ESPs.
Despite negative ESPs we believe that big financial stocks and ETFs are up for a rally in the coming days. The regional banking crisis has bolstered investors’ faith in big banks as these are swelling with deposits. As inflation has shown signs of easing and the labor market is cooling (though still strong), the Fed may slow the rate hike momentum, bolstering risk-on sentiments.
If this happens, long-term rates will go up. 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.
There is only one wall of worry. If a recession hits the U.S. economy, banks’ business conditions may worsen. Bad loans or non-performing assets may go up. But it is a distant possibility at this moment. 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 - 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.
Goldman has moderate exposure in the aforementioned ETFs. It is heavy on iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI - Free Report) . The bank ETFs are down in the range of 0.7% to 1.7% in the past five days versus a 0.5% decline in the S&P 500 (as of Apr 10).
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How Are Bank ETFs Shaped Before Q1 Earnings?
Big banks will start releasing their quarterly numbers this week. The outlook is moderate this time, thanks to the regional banking crisis emanating in March 2023 and investors shifting deposits to big banks. 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 banks, JPMorgan Chase & Co. (JPM - Free Report) , Wells Fargo & Company (WFC - Free Report) , Citigroup Inc. (C - Free Report) are likely to report on Apr 14.
JPM has a Zacks Rank #3 and an Earnings ESP of -0.77%.
WFC has a Zacks Rank #3 and an Earnings ESP of +7.24%.
C has a Zacks Rank #3 and an Earnings ESP of +0.12%.
On Apr 18, Goldman Sachs (GS - Free Report) is likely to come up with its earnings release. Goldman has a Zacks Rank #3 and an Earnings ESP of +0.07%.
Bank of America Corporation (BAC - Free Report) is expected to report on Jan 18. BAC has a Zacks Rank #4 and an Earnings ESP of -3.36%.
Morgan Stanley (MS - Free Report) , too, is likely to report on Apr 19. MS has a Zacks Rank #3 and an Earnings ESP of -1.35%.
Are a Few Negative ESPs At All a Threat to Financial ETFs?
As discussed above, the chances of a broad-based earnings beat are moderate as most stocks currently have a positive ESP while a few have negative ESPs.
Despite negative ESPs we believe that big financial stocks and ETFs are up for a rally in the coming days. The regional banking crisis has bolstered investors’ faith in big banks as these are swelling with deposits. As inflation has shown signs of easing and the labor market is cooling (though still strong), the Fed may slow the rate hike momentum, bolstering risk-on sentiments.
If this happens, long-term rates will go up. 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.
There is only one wall of worry. If a recession hits the U.S. economy, banks’ business conditions may worsen. Bad loans or non-performing assets may go up. But it is a distant possibility at this moment. 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 - 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.
Goldman has moderate exposure in the aforementioned ETFs. It is heavy on iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI - Free Report) . The bank ETFs are down in the range of 0.7% to 1.7% in the past five days versus a 0.5% decline in the S&P 500 (as of Apr 10).