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Will Bank ETFs Sizzle on Fed & Trump Influenced Q1 Earnings?

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Quarterly earnings releases will hit the market in full swing this week. Big banks are all set to report. Let’s dig deeper into the likely earnings picture 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 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) and Citigroup Inc. (C - Free Report) are likely to report on Apr 13. JPM has a Zacks Rank #3 and an Earnings ESP of +0.29%. The same is the kind of surprise prediction for Wells Fargo, with a Zacks Rank #3 and an Earnings ESP of +0.73%.

On the other hand, Citi has a Zacks Rank #3 and an Earnings ESP of -0.74%. This lowers the predictive power of ESP because a negative ESP dampens our surprise prediction power that gets a boost from a favorable Zacks Rank.

Bank of America Corporation (BAC - Free Report) is expected to report on Apr 16 before the market opens. The stock has a Zacks Rank #3 and an ESP of -0.31%. Needless to say, here also, surprise prediction is tough. All four stocks hail from a top-ranked Zacks Industry (top 38%).

On Apr 17 and Apr 18, GoldmanSachs Group Inc. (GS - Free Report) and Morgan Stanley (MS - Free Report)  are likely to come up with their earnings releases, respectively. Both have a Zacks Rank #3 and an ESP of 0.00%, which doesn’t make them sure-shot candidates for an earnings beat.

Notably, while both stocks belong to a top-ranked Zacks industry (top 49%), the VGM Scores are not favorable with Goldman having a score of D and Morgan Stanley having a score of C.  

What Fundamentals Indicate About Bank ETFs?

As discussed above, chances of a broad-based earnings beat are moderate. However, the financial sector, is likely to log a strong show in Q1 and the coming quarters, per the Earnings Trends issued on Apr 11, 2018 (read: Inside Q4 Earnings Performance of Banking ETFs).

Major banks, which make up about 45% of the sector’s total earnings in the S&P 500, are expected to post 11.3% earnings growth on 4.8% higher revenues. It is the Fed and Trump who can drive the sector.

The Fed in the form of policy tightening and consequent higher yields should have benefited the sector in Q1. The yield on the benchmark U.S. Treasury started 2018 with 2.46%, hit a high of 2.94% in February, but finally came down to 2.74% on Mar 29.  The average benchmark bond yield in Q1 of 2018 was around 2.7615%, up from 2.4466% average yield recorded in the year-ago quarter (read: Q1 ETF Asset Report: Developed Markets Win, High-Yield Loses).

Trump in the form of tax reform, which has been passed in late 2017, can benefit the financial space. Financials pay the highest effective tax rate at 27.5% in the S&P sector universe, according to a Wells Fargo analysis of historical tax rates, quoted on Reuters. Naturally, the section is poised to perform better in a low-tax environment (read: Best ETF Strategies for a Hawkish Fed).

ETFs in Focus

So, investors pinning their hopes on a moderate-to-upbeat earnings season, Trump’s policies for a fiscal boost 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) , Financial Select Sector SPDR (XLF - Free Report) and Vanguard Financials ETF (VFH - Free Report) are performing before the earnings releases.

These funds have considerable exposure to the aforementioned stocks. Goldman has moderate exposure in the aforementioned ETFs; rather it is heavy on iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI - Free Report) (see all Financial ETFs here).

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