Large-cap financial stocks have finally broken out, after a mostly quiet 2017. The sector rallied after the U.S. presidential election in November, buoyed by hopes of deregulation and higher interest rates.
But with little movement in D.C., either from Congress or the Federal Reserve, investor patience faded and investor optimism waned. The iShares Dow Jones US Financial (ETF) (NYSEARCA:IYF) actually fell, albeit modestly, between late February and early September.
Since Labor Day, however, the sector has taken off. The Fed is unwinding its balance sheet, which may finally lead to higher rates — and higher spreads for consumer banks. IYF is up 6.5% in the last month alone, and most large-cap banks have made even bigger gains. Now three of those banks report earnings next week. And with expectations rising, those reports look key.
The sector needs to convince investors, and the Street, that more upside is ahead. Mixed news on credit quality of late means charge-off rates will be closely watched. But, most importantly, investors will be looking for some confirmation from the nation’s largest banks that there’s more juice in the rally in the sector, and in the market as a whole.
With that in mind, here are three earnings reports investors need to keep an eye on next week.
Earnings Reports to Watch: Citigroup (C)
Citigroup Inc (NYSE:C) reports on Thursday morning, opening earnings season for large-cap financials. And Citi may have the toughest selling job of any of the major banks.
For one, the company is going first, at a time when expectations toward the sector as a whole are clearly rising. That’s doubly true for C stock, which has been the best performer in the space, gaining over 27% year-to-date.
Street expectations aren’t terribly high, with analysts expecting a 5.6% increase in EPS on relatively flat revenue. But those expectations are wide: the Street-low estimate projects a decline year-over-year, while the most bullish analyst expects more than 11% bottom-line growth. There’s a reasonably large range there — and room for Citigroup to disappoint.
From a trading standpoint, the combination looks somewhat dicey. C stock now sits at its highest levels since before the financial crisis. (Somewhat amazingly, it’s still down 85%+ from 2007 peaks, however.) Expectations are almost as high. At the same time, Citigroup has to set the tone for the space — and set it well.
Unless Citigroup can post a blowout quarter, I might expect some profit-taking after earnings.
Earnings Reports to Watch: JPMorgan Chase (JPM)
Looking backward, it doesn’t seem too smart to bet against JPMorgan Chase & Co. (NYSE:JPM) ahead of earnings. Like C stock, JPM has benefited over the past month from optimism toward the financial sector.
But lately, JPMorgan also has a pretty solid track record against the Street.
JPM has beaten consensus on the bottom line for the last seven quarters; and by at least $0.12 in each of the last five. And yet the Street doesn’t look particularly aggressive this time around, either. Consensus estimates project just a 4.4% increase in earnings-per-share year-over-year, on a YOY drop in revenue.
But there are a couple areas of possible concern in JPM’s third quarter report, which is due Thursday morning. JPM stock actually fell after the Q2 report, after the company lowered its guidance for full-year net interest income. Higher funding costs were the culprit, and if those costs continue into Q3, investors may be less optimistic about the potential impact of rate hikes on those spreads.
And given JPM’s large investment banking operation, trading revenue will be closely watched. Revenue has fallen across the Street, including at rival Goldman Sachs Group Inc (NYSE:GS), though JPMorgan managed a strong first half on that front. But with volumes still looking low in the fixed-income markets, that performance may not repeat in Q3.
So, while investors have bid up JPM on optimism toward its consumer business, it very well may be the investment banking side that’s the focus after third-quarter results.
Earnings Reports to Watch: Bank of America (BAC)
Bank of America Corp (NYSE:BAC) follows on Friday morning. Like Citigroup, BofA has had a strong 2017. And like C stock, BAC stock is at its highest levels since the financial crisis.
That said, BofA does look potentially better-positioned for gains coming out of Q2 than C stock, or other large-cap peers. BAC’s gains haven’t been nearly as large YTD as Citigroup; the stock is up, but just 18%, not much better than the S&P 500’s 14% rise. Earnings expectations are higher, with the Street looking for 12% growth.
But those expectations actually have come down over the past month, and BAC hasn’t missed analyst consensus since Q4 2015. BofA’s credit metrics have been solid as well, and with rate hikes looking increasingly likely, credit is the most likely stumbling block for this round of bank earnings.
And Bank of America gets the benefit of reporting the day after Citigroup and JPMorgan Chase. If Citi and JPM numbers beat, that likely generates a ‘halo effect’ toward the sector as a whole from investors and analysts.
If they miss, BofA has a chance to do better by comparison. The reports from the space as a whole, along with interest rate expectations, likely will determine where the individual stocks trade over the next few months. But in the near-term, it looks like BAC has a real chance for a nice post-earnings pop on Friday.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.