Bank earnings could be good news for the S&P 500

  • By Nicholas Jasinski,
  • Barron's
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The biggest U.S. banks reported first-quarter earnings this past week, and their tone was uniformly optimistic. While there’s been no shortage of commentators and prognosticators forecasting a looming economic recession, big banks’ leaders told investors they see no signs of one on the near horizon.

Executives from Bank of America (BAC) and U.S. Bancorp (USB) both called the U.S. economy “solid” on their earnings calls. JPMorgan Chase (JPM) CEO Jamie Dimon rattled off a list of positive economic indicators.

“Do you have to have a recession?” he asked on the bank’s earnings call last Friday. “...The consumer’s in good shape, the balance sheet’s in good shape, people are going back to the workforce, companies have plenty of capital...business confidence and consumer confidence are both high...So it could easily go on for years. There’s no law that says it has to stop.”

PNC Financial Services (PNC) CEO William Demchak said on Wednesday that he had seen “very little from [PNC’s] clients that would indicate that there is inherent weakness in the U.S. economy.”

A strong U.S. economy is naturally good for business: Most of the banks saw bigger-than-expected gains in consumer lending, deposits, and credit card spending. That dynamic helped propel JPMorgan, Bank of America, Citigroup (C), and others to exceed their earnings expectations.

They did sound one more cautious note: A flattening yield curve could pressure banks’ net interest margins. Banks tend to borrow short to lend long and rely on a normally sloping yield curve. Bank of New York Mellon (BK), whose stock dropped 9.5% after it reported earnings on Wednesday, saw an 8% decrease in net interest revenue in the first quarter. It expects another 3% to 5% decline in the second quarter as competition for deposits forces banks to pay higher rates on interest-bearing deposits.

Regardless, the earnings beats made for a good period for the Financial Select Sector SPDR fund (XLF), which has climbed 2.6% over the past five trading days—led by a 6.8% rise for JPMorgan and a 6.1% gain for Morgan Stanley (MS). The S&P 500 index (.SPX) rose 0.6% over the same period.

It was a welcome relief for investors in financial stocks. The sector is one of the S&P 500’s worst performing over the past year, down 0.4% versus a 7.3% rise for the index. Leaders, including technology, real estate, and consumer discretionary, are each up more than 14% over the past 12 months.

Continued gains could help propel the market to record highs, according to Edward Yardeni, president of Yardeni Research. “If [financial stocks] can continue their winning ways, that just might be enough to push the S&P 500 to new highs,” he wrote to clients on Thursday. “The financial sector represents 12.8% of the S&P 500’s market capitalization, making it the third largest of the S&P 500’s 11 sectors, and it kicks in 18.7% of the index’s earnings.”

The sector trades for 12.2 times 2019 earnings, versus a 17.4 times multiple for the broader S&P 500, which closed on Thursday just 0.9% short of its record high. A dose of faster earnings growth may help provide a needed catalyst to lift financial stocks further. The analyst consensus estimate is for the sector’s earnings per share to increase 8.2% this year, versus 3.7% for the S&P 500.

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