As analysts grow more pessimistic about third quarter earnings results, banks could surprise the markets this week and potentially lift financial sector exchange traded funds.
The five largest U.S. banks by market cap are due to report third quarter results this week, with JPMorgan (NYSE: JPM) set to kick things off Tuesday, followed by Goldman Sachs (NYSE: GS), Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC) and Citigroup (NYSE: C) to post earnings through the week.
Despite a “challenging capital markets quarter,” Jason Goldberg, Barclays managing director and senior equity analyst, favors the bigger banks over the regional ones, CNBC reports. “We think the regulatory environment is getting a little bit easier as the banks put some legal woes behind them.”
Goldberg favors large banks like GS, JPM and C for their “cheaper valuations.”
ETF investors can track the industry through sector fund options, like the Financial Services Select Sector SPDR (NYSEArca: XLF), which includes a 8.5% position in WFC, 8.0% in JPM, 5.7% in BAC, 5.4% in C and 2.5% in GS. The financial is also trading a cheaper multiples, compared to the broader U.S. equities market. XLF shows a 13.4 price-to-earnings ratio and a 1.2 price-to-book, whereas the S&P 500 index is trading at a 17.0 P/E and a 2.3 P/B.
While the sector has lagged the broader market in recent weeks and earnings estimates have turned lower, financial firms are still expected to show earnings growth of 8.4%, falling behind only telecoms and consumer discretionary companies in expected growth for the quarter, reports Chuck Mikolajczak for Reuters.
Nevertheless, the earnings projects are still lower than the 14.8% expected at the start of the quarter and 17.8% growth at the start of the year. Banks have seen estimates steadily fall over the past 30 days.
The Federal Reserve’s decision to hold off on an interest rate hike, ongoing economic weakness and concerns over trading revenues have weighed on the financial sector’s outlook.
Given the recent spike in volatility, market participants anticipate larger swings than usual this earnings season. While bank shares move about 2% after an earnings announcement, swings one-and-a-half times the average are expected ahead.
“Participants are bracing for a bit more volatility than in past quarters,” Fred Ruffy, strategist at options analytics firm Trade Alert, told Reuters.
Financial Services Select Sector SPDR
For more information on the financials sector, visit our financial category.
Max Chen contributed to this article.