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Should You Buy Bank ETFs Before Earnings Release?

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It’s time for full-fledged releases of quarterly earnings. Big banks will start reporting from this week. Let’s dig deeper into the likely earnings picture of the big six banking companies that could drive the performance of the sector ahead (read: Buy These ETFs & Stocks as Q3 Earnings Unfold).

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 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) and Citigroup Inc. (C - Free Report) are likely to report on Oct 12. JPM has a Zacks Rank #3 and an Earnings ESP of -0.53%. This lowers the predictive power of ESP because a favorable Zacks Rank when combined with a negative ESP makes surprise prediction difficult. The stock has a VGM Style Score of D and a Zacks Industry Rank in the top 38%.

The same is the surprise prediction for Citigroup. Despite a Zacks Rank #3, an ESP of -0.29%, a VGM Style Score of F and a Zacks Industry Rank of bottom 38% spell trouble for the stock.

On Oct 13,Wells Fargo & Company (WFC - Free Report) , with a Zacks Rank #4 and an ESP of +0.03%, will report earnings results. This once again makes chances of an earnings beat poor.

Bank of America Corporation (BAC - Free Report) is expected to report on Oct 13 before the market opens. The stock has a Zacks Rank #3 and an ESP of -0.66%. Needless to say, here also, surprise prediction is tough. WFC and BAC have a VGM Score of D and F, respectively. Plus, the Zacks Industry Rank of both is in the bottom 8%.

On Oct 17, Morgan Stanley (MS) and Goldman Sachs Group Inc. (GS - Free Report) are likely to come up with their earnings releases. Morgan Stanley has a Zacks Rank #3 (Hold) and an ESP of -1.46%. While the earnings beat is difficult to predict, a VGM Score of B and a Zacks Industry Rank of top 23% are positives about the stock.

Goldman has a Zacks Rank #3, a VGM Score of F and an ESP of 0.00%.The stock’s Zacks Rank #3, when combined with a 0.00% ESP, doesn’t make it a sure-shot candidate for an earnings beat. But the stock’s Zacks Industry Rank is in the top 23%.

What Does ESP Tell About Bank ETFs?

As discussed above, chances of a broad-based earnings beat are anything but high.Total Q3 earnings for the Zacks Major Banks industry are expected to decline 5.1% from the same period last year on 2.2% higher revenues, as per the Earnings Trends.

It is the Fed and Trump who can save the sector. The Fed in the form of policy tightening and consequent higher yields and Trump in the form of likely tax cuts may benefit the space.Notably, since banks' effective tax rates hover in a range as high as 25-35%, these are likely to benefit more from the tax reform plan, as per analysts (read: Best ETF Strategies for a Hawkish Fed).

Market Impact

Still, investors pinning their hopes on a moderate earnings season, Trump’s promises for deregulation and faster Fed policy tightening, 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) , PowerShares KBW Bank ETF (KBWB - Free Report)  (KBWB - Free Report) , Financial Select Sector SPDR (XLF - Free Report) and Vanguard Financials ETF (VFH - Free Report)  (VFH - Free Report) are performing before the 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) . All these ETFs were in line with the S&P 500-based ETF SPY in the last five days (as of Oct 9, 2017) (read: 5 Winning ETF Strategies for Q4).

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