US financials have been flying, but earnings now dominate

Virtually every research house has a ‘buy’ or ‘outperform’ call on the US financial sector and most feel that, if we are genuinely going to see better growth and inflation under a Trump administration, then there is no better sector to own than financials.

Source: Bloomberg

Clearly, this view is already playing out, and looking at the S&P 500 sub-sectors since Trump’s election win, we can see the investment bank sub-sector +30.7%, regional banks +25.1% and diversified banks +23.7%.

Another way to trade the financial space is through the KBE ETF (SPDR S&P Bank ETF), which has gained 26% in the same period.

Dates of reports:

13 January - JP Morgan (expected to report at 22:45 AEDT. Consensus forecasts for earnings per share, or EPS, sit at 143c, with revenue forecasts at $24.17 billion)

13 January - Bank of America (Report at 22:45 AEDT. EPS of 38c, revenue of $20.836 billion)

14 JanuaryWells Fargo (Report at 00:00 AEDT. EPS of 100c, revenue of $23.472 billion)

17 JanuaryMorgan Stanley (Report at 23:00 AEDT. EPS of 64.7c, revenue of $8.44 billion)

18 JanuaryGoldman Sachs (no set time to report, EPS of 476c, revenue of $7.72 billion)

19 JanuaryCitigroup (Report at 00:00 AEDT, EPS of 113c, revenue of $17.295 billion)

US Q4 earnings will be interesting as expectations for earnings growth in the financial space are huge, with consensus EPS growth forecast at 21.5% (source: UBS research). This compares to 4.6% EPS growth for the broader S&P 500, with the utility sector expected to have the second-strongest EPS growth at 8.3% yoy. One suspects that after such a strong run, and with valuations rich, that the various financial institutions will not only have to beat expectations, but will need to outline an inspiring outlook.

Whether you are an equity trader or have a greater focus on the macro, then the outlook statements from CEOs are absolutely key. One finds it hard to believe the banks will give an explicit view on what they expect to fully materialise from Trump’s proposed fiscal plans, but they will be enthused at the prospect of greater margin expansion. Of course, the offset for the banks from higher longer-term rates is the impact this could have on demand. However, the combination of a steeper yield curve and tax cuts to households and businesses promote a belief that we should see very strong earnings growth in 2017.

The potential for lower regulation is also a potential tailwind for the space, even if it could take time to be fully implemented.

Two key themes worth watching will be stronger trading revenues and the prospect of increased share buy-backs and M&A. Keep in mind credit spreads are tighter (relative to Q3) and volatility increased in the reporting period, which in turn saw volumes pick up – activity from higher frequency clients should lift revenues. Loan growth will also be a focus and analysts expect a strong rebound in total loan growth in Q4, especially in names like Bank of America and JP Morgan.

Of course, each bank has its own characteristics, whether that involves being leveraged to rising US bond yields, the housing market, financial market volatility or the consumer. However, what is clear though is that on the daily timeframe we can see startling similarities in the current set-up between JPM, C, GS, MS and BAC, with WFC lagging somewhat.  Clearly, market participants are not looking at the individual issues impacting each company, but have been trading them simply as just one big macro thematic view. That being said, IF Trump can execute effectively on his proposed fiscal measures and we see lower regulation, then the US banks are one of the best ways to take advantage of the positive impact this could have on net interest income (NII).

What’s the trade?

JPM has a strong pedigree of beating earnings expectations and we should see solid earnings and sales growth over the next few years. BAC and MS also look like solid picks, but to create diversification and not expose oneself to just one bank, the KBE ETF or KBW ETF is a good way to trade the underlying thematic. Again, on the daily chart price has simply been consolidating after a strong run higher from 4 November.

As a trade, my preference is to let price guide and wait for clarity that the bulls or bears are in charge. This suggests buying the break of the top of the range at $44.50, placing a stop on a close below $43.00. Short positions for $40.17 also look good on a closing break of $43.00.

The great thing with trading the break is the market is effectively telling us all we need to know about the results and we simply follow the money flow.

With traders and investors holding so many questions about the potential for greater inflation and growth in the US economy, will the outlook statements and analyst briefings (from CEOs) give us clarity about how the key beneficiaries of Trumponomics share the same optimism that many in markets have?


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