Early into the election victory of now-President Donald Trump, the “Big Four” bank stocks were one of the immediate beneficiaries. Bolstered by promises of fewer regulations, virtually the entire financial complex shot higher. With a tough economic environment that hindered lending services, the last thing bank stocks needed was more bureaucracy. Although a bit on the outspoken side, President Trump gave the industry the confidence it needed.
The ride was sweet while it lasted. From the general election of November 8, 2016 till the end of the year, the benchmark Financial Select Sector SPDR Fund (NYSEARCA:XLF) gained nearly 17%.
But that enthusiasm did not carry over into 2017. For the first quarter, the XLF only registered a mere 1%. Naturally, some bank stocks fared better than others, particularly some of the smaller outfits. But by and large, the majors failed to impress in the markets.
That’s a major talking point for the upcoming Q1 earnings report for the Big Four bank stocks. While the broader SPDR S&P 500 ETF Trust (NYSEARCA:SPY) enjoyed a solid Q1, March was forgettable, losing 0.7%. Wall Street is clearly looking for direction now that the “Trump rally” has waned. As bellwethers of the economy, analysts will closely dissect the earnings results for the majors.
In turn, the big bank stocks have questions of their own. According to bond market experts, the 10-year yield for U.S. Treasuries has trended flat over the past five months. That’s not an encouraging sign for bank earnings as all lending institutions depend heavily on the key interest rate.
To add to the pressure on bank stocks, Wall Street has high expectations for their earnings results. Since the economy is improving on paper, and because of the hawkish tone of the U.S. Federal Reserve, the key players of finance are now held to a higher standard.
Indeed, Q1 earnings are the litmus test for the Trump administration. The post-election rally could be chalked up to dumb luck. With the country relatively settled in, executive policy will have more leverage. No matter what the results, the earnings reports for the Big Four bank stocks are promising fireworks!
Bank Stocks to Watch: JPMorgan Chase & Co. (JPM)
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In his annual letter to JPM shareholders, Dimon wrote that there is “something wrong” with our nation. Careful to not wade into ugly politics, the JPM head blasted ineffective policies that stymied economic growth.
Further, he criticized “low wage growth, high health-care costs and overcrowded prisons,” according to CNBC contributor Jeff Cox.
As expected, the CEO put a positive spin on the overall picture, particularly as it relates to JPM: “We believe the anticipated reversal of many negatives and the expectation of a more business-friendly environment, coupled with our sustained, strong business results, are among the reasons our stock price has done so well this past year”. The issue is whether that will be enough to satisfy potential buyers today.
Undoubtedly, JPM has advantaged the Trump rally well. But since the beginning of March, JPM is down 5%, reflecting the same weakness found in other bank stocks. Furthermore, for its upcoming Q1 report, JPM is expected to hit an earnings-per-share target of $1.52. This is nearly 21% higher than the EPS forecast for the year-ago quarter.
Interestingly, the last Q1 miss for JPM was in fiscal 2014. At that time, analysts expected an EPS target of $1.40, which was only 1% higher than the Q1 2013 target. With so much at stake, JPM has a very high wall to climb.
Bank Stocks to Watch: Bank of America Corp (BAC)
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Efforts such as convenient online banking accounts were rewarded by the markets. For 2016, BAC shareholders saw their portfolios rise by more than 36%.
This year, though, has been an exercise in contrasts. BAC is up 5% since the January opener — not bad, but certainly not great. All of the pain is resultant of the month of March, where BAC shed 7% in the markets. Presently, shares are below its 50-day moving average. It goes without saying that Q1 earnings is a critical make-it-or-break-it moment.
Consensus estimates for the EPS target is 35 cents, which is a whopping 67% higher than the year-ago forecast. Furthermore, the current target is decidedly on the higher end of the estimate spectrum. No matter how you look at it, that is a tall order. Revenue for BAC is improving, but not by a remarkable amount. Therefore, the bulk of the growth will have to come from cost-cutting, which is a double-edged sword.
Given its penchant for pulling off surprises, you don’t want to count BAC completely out. But out of the big bank stocks, BofA arguably has the toughest road ahead.
Bank Stocks to Watch: Citigroup Inc (C)
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While that’s a death sentence in Hollywood, for bank stocks, that’s almost always a blessing. These days, if a financial institution is splattered on the news, you can bet the house that something illegal occurred. C stock is almost boring, which few will complain about.
However, being relatively controversy free hasn’t translated to outstanding gains. True, C stock joined its Big Four brethren, gaining 19% in last year’s Trump rally. Unfortunately, this year is a completely different story. C stock mostly gyrated in a sideways channel, and is currently up only 0.5% year-to-date. It does happen to be trading above its 50-day moving average, but that status looks somewhat tenuous.
For its Q1 earnings report, C stock has an EPS target of $1.25. Against the year-ago forecast, the consensus has risen 21%. No doubt, that’s a hefty lift, but it’s within the normal range of optimism for major bank stocks. That’s the good news. The bad news is that C stock is bogged down with awful sales figures. Over the last six quarters, year-over-year revenue growth averaged losses of 6%.
Unless a miracle happens, C stock will again depend on cost-cutting measures to meet earnings expectations. The dilemma is that the Trump administration promised prosperity through growth, not through austerity. So no matter what, Citigroup faces a tricky situation.
Bank Stocks to Watch: Wells Fargo & Co (WFC)
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Although the monetary settlement from last year’s controversy is merely a pittance for WFC, it’s the damage to its reputation that will sting for years to come. After all, we’ve heard of financial fraud. I don’t think anyone has dreamed up creating fake accounts to boost sales.
But despite this black eye to the financial industry, WFC stock performed extraordinarily during last year’s Trump rally. Shares jumped 21% amid the shock of the century, or even the shock of the millennium. As they say, “only in America!” But that optimism quickly faded this year, where WFC stock is up only 0.15%. Worse yet, shares tripped badly in the latter half of March. Due to its frail technical status, WFC is at risk for further volatility.
That’s especially dim news heading into its Q1 earnings report, where analysts expect EPS of 97 cents. This is exactly in line with the year-ago consensus. Also, WFC has a long history of consistently meeting or exceeding earnings expectations. Of course, the problem this time is the scandal’s long-term impact. Revenue growth has noticeably fallen over the last two quarters, so an earnings beat is no longer a guarantee.
The dilemma for WFC is that investors may not want the baggage that comes with owning an embattled brand. That’s a Catch-22 situation that doesn’t look favorable for Wells Fargo.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
