Third-quarter earnings reports have already been trickling in, but earnings season kicks into high gear this week with a deluge of updates from the financial services sector, the S&P 500’s second-largest sector allocation at a weight of nearly 16.4%.
Although the sector has delivered some solid showings in recent quarters, investors are not expecting much in the way of big upside earnings and revenue surprises from financials for the third quarter. Estimize believes third-quarter earnings per share growth for the financial services sector will be just over 4% while revenue growth is expected to be about 4%.
That leaves some room for potential, emphasis on “potential,” EPS surprises. On Tuesday, J.P. Morgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC) report while Bank of America (NYSE: BAC) and Citigroup (NYSE: C) follow on Wednesday.
Those are four of the top-five holdings in the Financial Select Sector SPDR (NYSEArca: XLF), the largest U.S. sector ETF. That quartet of stocks combine for about 28% of XLF’s weight. Robust loan growth could be the catalyst for some third-quarter earnings beats by bank stocks.
Total loans and leases at U.S. commercial banks was 6.2% higher than they were year-over-year as of September 17, reports John Carney for the Wall Street Journal. Specifically, commercial and industrial loans have increased 12.1% year-over-year. Commercial real-estate loans rose 7.3%. Additionally, overall real-estate loans were up 2.5%. [Loan Growth Could Lift Bank ETFs]
Still, the sector’s expected third-quarter EPS growth exceeds only exceeds that of two sectors – telecom and utilities – while revenue growth is expected top that of four sectors, according to Estimize.
Another ETF to keep an eye on this week is the Fidelity MSCI Financials Index ETF (NYSEArca: FNCL). FNCL allocates over 22% its weight to the aforementioned stocks. About a week away from its first anniversary, FNCL had nearly $148 million in assets under management as of Sept. 30. The ETF has added $13.6 million since the start of this month. [Fidelity ETFs Quick t $1B in Assets]
In a sign that some investors and ETF strategists are betting on a rally in the financial services sector, XLF has raked in nearly $148 million just this month as some investors have warmed to bank stocks as value plays.
Several of the marquee constituents in XLF and FNCL mentioned here trade at discounts to the S&P 500. Additionally, dividends are beginning to rise as well. The average financial sector yield dipped to 1.22% in December 2009 from 4.44% in December 2008, and now, yields are back up to 1.6%. Financials have been among the biggest drivers of S&P 500 dividend growth over the past several years. [Bank ETFs as Value Plays]
Fidelity MSCI Financials Index ETF
