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Banks Rally Into Earnings: What This Means

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Banks have rallied hard over the past quarter as the majority of America’s largest banks gain over 20% in the past 3 months, substantially outpacing the market. These financial institutions are the first to report Q4 earnings beginning next week. What does this recent rally mean for Q4 earnings expectations?

hese stocks had traded sideways for most of the year, with investors concerned about falling interest rates and a global economic slowdown. In the final 3 months of the year, investors and traders started to re-allocate assets into this under-assigned sector. Interest rates bottomed out in September and gained some upward momentum when the Federal Reserve announced they would not be adjusting the Fed Funds rate, America’s interest rate benchmark, for the foreseeable future. Global economic pressures seem to be easing with a US-China trade conflict ostensibly coming closer to a resolution every day.

Investors revived confidence in financials is going to be tested next week, with the major banks reporting their Q4 results. The financial rally coming into earnings is setting the bar high, and an earning beat may not be enough to keep this rally going.

JP Morgan (JPM - Free Report)

JPM has risen 20% over the past 3 months as traders and investors put their bets on the US’s largest bank. Analysts have increased expectations for its Q4 earnings following a big top and bottom-line beat in its latest quarterly results in October.

JPM is reporting its December quarter earnings Tuesday, the 14th of January. Zacks Consensus estimates demonstrate an EPS of $2.30 on sales of $27.3 billion, representing year-over-year growth of 16% and 4.4%, respectively.

JPM typically is not a big mover on earnings, but this may change with the stock’s massive Q4 rally coming into earnings. JPM has missed its topline estimate every December quarter for as far back as I can see (2013). This could spell trouble for JP Morgan next week.

Bank of America (BAC - Free Report)

BAC’s shares gained more than 23% over the past 3 months, illustrating one of the most robust Q4 rally in the financial sector. BAC also beat its Q3 estimates by a sizable amount, and analysts’ full-year expectations rose for the next couple of years, pushing this stock into a Zacks Rank #2 (Buy). I personally think that this 25% appreciation since its last earnings has more than priced in the rise in future earnings.

Bank of America is reporting its earnings on Wednesday the 15th of January before the bell. Once again, the bar is set high for BAC, though they are expecting a marginal year-over-year decline in EPS and revenue. Zacks consensus estimates demonstrate an EPS of $0.68 on revenues of $22 billion.

BAC is typically not a big mover on earnings and has historically been conservative and had a positive price action.

Citigroup (C - Free Report)

Citi shares have grown by just over 16% in the past 3 months, which is a softer rally than the broader space due to its industry outperformance throughout 2019. C returned investors over 45% (including dividends) in the past 52-weeks compared to the industry’s 32% returns.

Citigroup is reporting its December quarter earnings before market open on Tuesday the 14th of January. According to Zacks Consensus estimates, Citi is expected to report a Q4 EPS of $1.82 on revenues of $17.7, representing year-over-year growth of 13% and 3.4%, respectively.

If I had to choose a bank to invest in, it would be Citi due to its cheap valuation and long-term growth outlook. C is trading a P/B of below 1, which is a sizable discount to its closest competitors. 12 out of 13 sell-side analysts are calling these shares a buy with an average price target that represents a 13.5% share appreciation.

Take Away

Next week is going to dictate whether banks' current rally has legs or not. Look for these three critical earnings I discussed for a directional move in the banking sector.

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