J.P. Morgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC) delivered quarterly results last Friday with the former reporting its first loss under CEO Jamie Dimon.
Dow component J.P. Morgan may be a special case because of a whopping pretax legal charge of $9.2 billion, but it still looks like this could be a volatile earnings season for the financial services sector, the second-largest sector weight in the S&P 500 behind technology. That volatility could be the result of hyperbole from the media and traders.
“Granted, coverage should be somewhat muted. Economically, we’ve steered into a nasty patch of weather. The banks are obviously sensitive to that. But if you look hard, you can see that the media – and, by extension, traders – are overreacting by a length,” wrote Marek Fuchs for The Exchange on Yahoo Finance.
Exaggeration aside, the week ahead is a critical one for financial service s ETFs, including the group’s biggest member: The Financial Select Sector SPDR (NYSEArca: XLF). It has been a good year for XLF, for the most part. The fund ranks as the third-best sector SPDR, trailing only its discretionary and industrial equivalents. Additionally, XLF has been one of the most prolific asset gatherers among sector ETFs, raking in $2.6 billion in new investments this year. [XLF Races for Inflows Bronze Medal]
Those superlatives do not change the potentially rocky earnings road XLF and its rivals face this week. On Tuesday, Citigroup (NYSE: C) and Charles Schwab (NYSE: SCHW) report earnings. No big deal, right? Those stocks combine for just 7% of XLF’s weight. That is just the beginning of XLF’s earnings avalanche. [Citigroup Earnings Lift Bank ETFs]
On Wednesday, seven XLF components that combine for 16.6% of the ETF’s weight step into the earnings confessional. That group includes American Express (NYSE: AXP), Bank of America (NYSE: BAC) and BlackRock (NYSE: BLK).
New Dow component Goldman Sachs (NYSE: GS), among other XLF constituents report Thursday, and XLF will not see a casual a Friday when Morgan Stanley and (NYSE: MS) and SunTrust (NYSE: STI) take their earnings turns.
Worrisome is that as of Friday, 91 companies had issued negative guidance compared with just 19 issuing positive guidance, according to FactSet. Financial services at 33% have the second-lowest percentage of companies reporting earnings above estimates of any sector, FactSet said. Good news may come in the form of financials having the lowest forward 12-month P/E at 12.
XLF’s P/E is 13.41 with a price-to-book ratio of 1.26. The ETF may have already been pricing in some bad news. Over the past 90 days, XLF is up just 0.4% while the iShares Global Financials ETF (NYSEArca: IXG), which allocates 61% of its weight to non-U.S. companies, is up 6.7%.
Financial Select Sector SPDR
Tom Lydon’s clients own shares of American Express.