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Should You Bet on Bank ETFs Before Earnings Release?

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Big banks will start releasing their quarterly numbers this week. Let’s delve into the earnings potential 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 companies with 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 Jan 14. Though JPM has a Zacks Rank #2, its Earnings ESP of 0.00% makes surprise prediction difficult.

WFC has a Zacks Rank #3 and an ESP of -0.56%. The negative ESP lowers chances of a beat. The surprise prediction is the same for Citigroup. Despite a Zacks Rank #3, the company’s ESP of -0.39% spells trouble for the stock.

Bank of America Corporation (BAC - Free Report) is expected to report on Jan 15. The stock has a Zacks Rank #2 and an ESP of +0.13%.

Goldman (GS - Free Report) is about to report on Jan 15. It has a Zacks Rank #3 and an ESP of +1.34%.

On Jan 16, Morgan Stanley (MS - Free Report) is likely to come up with its earnings release. Morgan Stanley has a Zacks Rank #3 (Hold) and an ESP of -2.95%. Here, the earnings beat is difficult to predict.

Market Impact

As discussed above, chances of a broad-based earnings beat are moderate. Still, investors pinning hopes on a moderate earnings season 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) , Invesco KBW Bank ETF (KBWB - Free Report) , Financial Select Sector SPDR (XLF - Free Report) and Vanguard Financials ETF (VFH - Free Report) are placed before their 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) (read: Most Loved and Hated ETFs of 2019).

Bottom Line

Investors should note that XLF and VFH have a Zacks Rank #2. Other ETFs have a Zacks Rank #3. If the stock market rally continues, long-term bond yields will stage an ascent. Given a dovish Fed, a rise in long-term bond yields should work wonders for bank ETFs as this will widen banks’ net interest rate margin. So, whatever the earnings surprise is, investors can play these financial ETFs on the basis on yield curve movement.

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