Following their strongest quarter since 2021, bank stocks are gearing up for a high-stakes earnings season, as top executives from JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., and Wells Fargo & Co. prepare to share their insights on the US economy. The banking sector witnessed a remarkable 23% gain in the last quarter, outpacing the broader market.
After facing pressure throughout 2023, bank shares experienced a surge starting in late October, driven by growing confidence that the Federal Reserve would conclude its rate-hike campaign without triggering a recession. The current focus is on the potential timing of policy easing, with investors closely examining its implications for various aspects of the banking business, including loan portfolio health and deposit rate outlook.
While acknowledging that banks are no longer as undervalued as before, analysts, including Richard Ramsden from Goldman Sachs Group Inc., believe that current valuations are not considered stretched. Ramsden suggests that if banks report more positive results than anticipated in areas such as net interest income, loan growth, capital markets, and deposit pricing, it could lead to greater earnings and continued outperformance.
The KBW Bank Index experienced a slight decline of about 1% on Thursday, lagging behind the broader market, which remained largely unchanged.
In the coming week, attention will shift to earnings reports from Morgan Stanley and Goldman Sachs, and the first results from regional lenders, with PNC Financial Services Group reporting, providing insights into the performance of regional banks.
Expectations for the big banks’ fourth-quarter results are generally subdued due to higher funding costs. Forecasts indicate a potential drop in net interest income for the sector, alongside increased expenses and weak trading revenue. Loan growth is also expected to be modest. Companies are anticipated to disclose payments to the Federal Deposit Insurance Corp. resulting from regional bank failures in the previous year.
Despite the positive momentum in bank stocks, caution is advised. Inflation rates remain above the Fed’s target, and market expectations for rate cuts are more aggressive than the Fed’s signals. Analysts, including those from BMO Capital Markets and UBS Group AG, have highlighted potential risks and advised investors to temper their enthusiasm. Hedge funds, institutions, and retail clients have been net sellers in the financial sector over the past four weeks, according to Bank of America Corp. data.
However, looking at the broader picture, financial companies are the only sector where the majority of analyst earnings revisions have been upwards over the past month, according to Citigroup Inc. data.
