Financial Sector Overview
This is the kickoff of the earnings season, but many investors are hoping it’s the kickoff for financials to get it in front of the rally parade once again. Developments coming into this earnings period are positive, including the recent stress test (I know it’s a joke, but it unleashed a windfall on shareholders), and the Fed has a new mission of hiking even in the face of disinflation.
Of course, these banks should be healthy after the Fed spent trillions buying up debt that had no place to go other than perhaps Yucca Mountain. Hence, the dividend increases and announced share buybacks, and a spark in share prices will surely put a floor beneath them as well.
Even with the great news, the S&P Financial Sector ETF (XLF) is still having trouble breaking through a double top formation. The index is up 33% in the past 52 weeks, but only 7.7% in 2017. It’s on the cusp of a major breakout that could have legs.
From a valuation point of view, shares of all the big banks are changing hands with similar valuations.
Although execution in the most recent quarter varied with JP Morgan (JPM), it is struggling to keep up the pace of revenue growth.
What to Watch (current rating)
Goldman Sachs (GS) (Buy) missed on earnings last quarter after its margin of beating consensus edged lower over the prior year. The fixed income was a disappointment, and investment banking’s increase of 16.4% didn’t keep pace with its peers. There is much anticipation of a major hike in a dividend and a massive buyback announcement.
JP Morgan’s (Buy) strong investment banking and investment management masked the growing problem of these banks not having to lend to Main Street. However, mortgage banking was -18% and cards/auto was -3%. Despite management, it still needs to find ways to expand operating margins (hopefully not at the expense of regular folks).
Morgan Stanley (MS) (Strong Buy) is best positioned for growth, which is tied to actually lending and has room to improve its wealth management business as well.
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