Financial stocks and sector-related exchange traded funds weakened Friday as second quarter earnings failed to meet expectations and palled in comparison to strong first quarter results.
The Financial Select Sector SPDR (NYSEArca:XLF), the largest financial sector-related ETF, declined 0.7% Friday.
Bank stocks have rallied in recent weeks but ran out of steam Friday after J.P. Morgan Chase (NYSE: JPM) was downgraded. While JPMorgan, Citigroup (NYSE: C) and Wells Fargo (NYSE: WFC) all beat analyst expectations for earnings, the financial sector still slipped on a lower trading revenue and weakness when compared to the first quarter
“The bar for earnings is higher this time around, especially after the phenomenal growth we saw in the first quarter. So companies that miss expectations or guide down will be overly punished,” Michael Scanlon, portfolio manager at Manulife Asset Management,” told Reuters.
JPMorgan anticipates net interest income to rise by around $4 billion this year, down from its earlier expectations of $4.5 billion, due to slower loan growth and a drop in long-term interest rates during the second quarter, the Wall Street Journal reports.
Moreover, JPMorgan’s second quarter total loans were only up 4% year-over-year, compared to 6% int eh first quarter and 7% for all of 2016. Others are also feeling the impact, with Wells Fargo’s total average loans up just 1% year-over-year, compared to 4% for the first quarter.
Related: U.S. Stock ETFs Hit Record Highs on Diminished Rate Hike Bets
Bankers are witnessing diminished demand for big loans out of businesses partly due to uncertainty over policy action on Capitol Hill. In addition, while the Federal Reserve’s rate hikes have helped banks earn more on loans, benefits were partially pared down by declines in long-term rates, with yields on Treasuries falling over the second quarter.
The Financial Select Sector SPDR Fund includes JPM 10.8%, WFC 8.2% and C 6.0% among its top holdings. The bank sub-sector makes up 44.6% of XLF’s portfolio.
For more information on the financial sector, visit our financial category.