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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. 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) and Bank of America (BAC - Free Report) are likely to report on Jan 12.

JPM has a Zacks Rank #2 and Earnings ESP of negative 4.79%.

WFC has a Zacks Rank #3 and an ESP of negative 5.59%.

C has a Zacks Rank #2 and an ESP of negative 34.45%.

BAC has a Zacks Rank #3 and an ESP of negative 0.85%.

On Jan 16, 2024, Morgan Stanley (MS - Free Report) is likely to report its earnings. MS has a Zacks Rank #3 and Earnings ESP of negative 1.28%.

Goldman (GS - Free Report) is also likely to come up with its earnings release on Jan 16. Goldman has a Zacks Rank #4 and an ESP of +5.63%.

Are So Many Negative ESPs At All a Threat to Financial ETFs?

As discussed above, chances of a broad-based earnings beat are low-to-moderate as several 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 on the likelihood of steepening yield curve. 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.

The United States is on a decent footing now. However, with the release of some upbeat economic data points, the long-term bond yields may go up in the coming days. This, in turn, may steepen the yield curve.

So, whatever the earnings surprise is, investors should track the yield curve movement before playing bank stocks. 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) 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) .

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