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How Are Financial ETFs Placed Before Q2 Earnings Release?

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Big banks will start reporting their Q2 earnings results this week. Let’s take a closer look at the possible earnings picture of the six big banking companies that could drive the performance of the sector. This is especially true as the Major Banks industry accounts for about half of the sector’s earnings.

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) , Citigroup Inc. (C - Free Report) and Wells Fargo & Company (WFC - Free Report) are likely to report on Jul 13.

JPM has a Zacks Rank #3 (Hold) and an Earnings ESP of +1.19%. This enhances the chances of an earnings beat this quarter. Wells Fargo, with a Zacks Rank #3 and an ESP of +0.33%, also has higher chances of an earnings beat.

The case is different for Citigroup. A Zacks Rank #3 and an ESP of -2.56% lower the predictive power of ESP because a favorable Zacks Rank when combined with a negative ESP makes surprise prediction difficult.

Bank of America Corporation (BAC - Free Report) is expected to report on Jul 16 before the market opens. The stock has a Zacks Rank #3 and an ESP of -6.10%. Needless to say, surprise prediction is tough here.

Morgan Stanley (MS - Free Report) is slated to report results on Jul 18. The company has a Zacks Rank #3 and an ESP of -3.12%. Here as well, an earnings beat is difficult to predict.

Goldman Sachs Group Inc. (GS - Free Report) has a Zacks Rank #3 and an ESP of -0.54%, which dims chances of a beat.

What Does ESP Tell About Bank ETFs?

As discussed above, chances of a broad-based earnings beat are low as only two out of the six have a positive ESP. Total Q2 earnings for the Zacks Major Banks industry are expected to rise 8.2% from the same period last year. This would follow the industry’s 25.4% earnings growth in the preceding quarter, per the Earnings Trendsissued on Jul 5.

The segment should pick up pace starting Q3 with the final two quarters of the year expected to see 11% and 15.3% growth, respectively. Fed’s policy tightening and the consequent higher bond yields as well as Trump’s deregulation and fiscal reflation should benefit the space.

Market Impact

Despite the not-so-encouraging earnings prospects, investors might want to keep an eye on financial ETFs like iShares U.S. Financial Services ETF (IYG - Free Report) , iShares US Financials ETF IYFInvesco KBW Bank ETF (KBWB - Free Report) , Financial Select Sector SPDR (XLF - Free Report) and Vanguard Financials ETF (VFH - Free Report) owing to upbeat factors like deregulation in the banking sector and faster Fed policy tightening. These funds have considerable exposure to the aforementioned stocks (read: How Financial ETFs Look After Fed Stress Test).

Goldman has moderate exposure to the aforementioned ETFs and is rather heavy on iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI - Free Report) . These ETFs have added 0.73% to 1.86% in the past five days (as of Jul 10). However, the returns in the space were lower than 2.53% offered by the S&P 500-based ETF (SPY - Free Report)  (see all Financial ETFs here).

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