US economy hobbles bank earnings: Q3 earnings season preview
US bank earnings may have some pockets of strength, but overall the tough economic outlook seen last time around persist ahead of Q3 earnings.
Pandemic effects hit US banks
It will not be an entirely negative earnings season for banks. On the positive side of things, banks will have reaped significant fees from the flow of initial public offerings (IPOs) and a bounce in corporate borrowing, which will help boost their bottom line for this quarter. But as the coronavirus pandemic goes on with no end in sight, concerns about the economic outlook are mounting.
The near-zero interest rate policy followed by the Federal Reserve (Fed) and the ongoing weakness in the broader economy continues to point towards a tough time for the banking sector. Companies still fear for the future, while workers are concerned that they will face unemployment further down the line as the US economy moves into another recession.
US economy faces tough times
It is a truism that banks are essentially a play on an economy. When the economy does well, so do banks. When it suffers, banks suffer too. This is something that bears repeating at every earnings season. This time around the US economy faces its biggest crisis since at least 2008, if not long before, and while the initial stimulus programme helped it to weather the storm, more will be needed. At present, there is little sign of any new stimulus, since both sides are unwilling to make compromises ahead of the presidential election. Thus markets have been left waiting for a stimulus programme that may be weeks away, if not more.
While a Joe Biden victory seems likely as we enter the final month before the election, there is no guarantee that the new occupant of the White House will be able to launch a stimulus effort straight away. A stimulus effort is seen as essential, in order to get the economy through until a vaccine arrives, but it may be a while before one arrives. Until then, the prospects for bank shares look tough.
US financials ETF: stock price technical analysis
While the broader S&P 500 has only recently hit an all-time high, and remains in a strong position despite the September selloff, the same cannot be said for the US banking and financial sector. The SPDR Financial Select Sector exchange-traded fund (ETF), which covers the major banks, has failed to make much headway since peaking in June.
Gains into August and September stalled around 2560, with the latter bounce hitting the 200-day simple moving average (SMA), currently 2506, while September’s low was below the 2370 level seen as support in July, although it did not breach the early July low at 2250. It is positive that the price has moved back above the 50-day SMA (currently 2455), but it will need to clear the August peak to avoid creating another lower high.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
Live prices on most popular markets
You might be interested in…
Find out what charges your trades could incur with our transparent fee structure.
Discover why so many clients choose us, and what makes us a world-leading provider of spread betting and CFDs.
Stay on top of upcoming market-moving events with our customisable economic calendar.