Major indices regained stability following an erratic week that ended Feb 9. Last week, the Dow Jones Industrial Average jumped 4.3%, marking the largest gain since the election of Trump. On top of that, the S&P 500 registered a gain of 4.3% over the last five trading sessions through the week ending Feb 16, the highest since 2013.
It seems investors are no longer fretting over the spike in inflation rates but are instead focused on record-low unemployment levels and better-than-expected job addition. In fact, analysts believe that the record job additions and strong GDP data will help the indices maintain the bullish momentum.
Investors should know that out of the 10 sectors tracking the S&P 500 index, the Financial industry rallied 4.7% last week. In particular, banks are poised to generate more profits from higher lending rates. In other words, the possibility of aggressive rate hikes by the Fed through 2018 will likely boost bank profits.
Fed May Raise Rate Aggressively
Per the U.S. Bureau of Labor Statistics, the consumer price index ticked up 0.5% through January 2018, beating market expectations of 0.3%. The index rose 2.1% over the past 12 months, indicating that the central bank might make an aggressive move to raise policy rates.
Leading investment management firm BlackRock added that the central bank could lift policy rates three or four times in 2018. The rate hike will increase the borrowing cost, leading to the payment of higher interest to lenders. This is expected to ensure higher lending income for banks.
Loans to Grow
The mid-month report of the University of Michigan shows that the U.S. consumer sentiment index for the month of February has not only touched a record high but has also risen more than market expectations.
The index scaled 99.9 in February, surpassing the estimate of 95.5 made by Reuters economists. It also reflects the second-highest mark over the past 14 years. This clearly shows that consumers are more interested in the news of low unemployment, wage growth, and solid GDP data than the market's tumultuous movement. Hence, significant job addition and healthy consumer sentiments will boost the demand for loans and other related products of banks.
GDP Data Solid: The nation’s GDP increased at a seasonally adjusted annual rate of 2.6% in the final three months of 2017, following gains in the previous two quarters of more than 3%, per the “advance” estimate released by the Bureau of Economic Analysis. In fact, this marked the economy’s strongest stretch of growth since the expansion started in mid-2009.
Notably, in the first quarter of this year, GDP is expected to jump 5.4%, per the latest estimate by Atlanta Fed.
Significant Job Addition & Low Unemployment: Per the U.S. Labor Department report, 200,000 new non-farm payroll jobs were created in January, beating market expectations. According to a survey by Reuters, most economists were expecting an addition of 180,000 jobs.
Also, the jobless rate remained at an ultra-low level of 4.1% and workers’ hourly wages increased 2.9% year over year in January 2017.
Tax Reforms to Benefit Banks
The tax bill, which was signed into law last year, will likely benefit banks. Although major banks took a hit in the fourth quarter owing to non-recurring non-cash chargea related to the tax reform bill, financial institutions expect the reform to prove beneficial in the long term.
During the fourth quarter, Citigroup Inc. (C - Free Report) reported net loss of $18.3 billion, or $7.15 per share. The results included a non-recurring non-cash charge related to the tax reform of $22 billion. However, Citigroup expects lower effective tax rate to drive net income.
Moreover, with the implementation of the Tax Cuts and Jobs Act (TCJA), JPMorgan Chase & Co. (JPM - Free Report) expects its effective tax rate to be 17% in the first quarter of 2018, 19% in 2018, and nearly 20% in the near term.
Both JPMorgan and Wells Fargo & Company (WFC - Free Report) believe that the tax reform will likely lower their effective tax rates to 19% for 2018. Media reports claimed that the rate for 2018 will be significantly below the actual rate paid during 2016 and hence will increase the combined profit of banks by at least $7 billion this year.
Which Stocks to Focus On?
Picking bank stocks with strong fundamentals seems to be a smart option but the task can be a daunting one.
This is where our proprietary Stock Screener comes in handy. We have narrowed down our search to the following four stocks based on a solid Zacks Rank and other favorable parameters.
Headquartered in New York, JPMorgan is a financial holding company with assets worth $2.53 trillion and stockholders’ equity worth $255.7 billion as of Dec 31, 2017. The company managed to beat the Zacks Consensus Estimate in all prior four quarters, with an average positive earnings surprise of 8.7%.
We expect the firm to witness earnings growth of 27.8% and 9% in 2018 and 2019, respectively. JPMorgan carries a Zacks Rank #2 (Buy).
Citigroup,based in New York, is a leading financial firm offering a range of financial products and services. The company surpassed the Zacks Consensus Estimate for earnings in all the prior four quarters, the average positive earnings surprise being 7.5%.
For 2018 and 2019, the company will likely report earnings growth of 20.1% and 14.8%, respectively. Citigroup carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Headquartered in Pittsburgh and incepted in 1983, PNC Financial Services Group Inc. (PNC - Free Report) provides consumer and business banking services. The company beat the Zacks Consensus Estimate for earnings in each of the prior four quarters.
Moreover, for 2018 and 2019, the Zacks #2 Ranked company is projected to post earnings growth of 22.8% and 10.6%, respectively.
Northern Trust Corporation (NTRS - Free Report) is the holding company for its main subsidiary, Northern Trust Company, as well as a number of other banking and non-banking financial service subsidiaries.
The #2 Ranked company posted an average positive earnings surprise of 2% for the last four quarters. We also expect the firm to post year-over-year earnings growth of 24.6% and 9.7% in 2018 and 2019, respectively.
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