Wall Street banks have kicked off the earnings season, with J.P. Morgan Chase (NYSE: JPM) and Citigroup (NYSE: C) revealing improving profits, but the financial sector and related ETFs don’t seem impressed.
The Financial Select Sector SPDR (NYSEArca: XLF), the largest financial sector ETF, was down 0.7% Thursday.
Both J.P. Morgan and Citigroup beat Wall Street profit estimates but revealed a dip in trading revenue, Reuters reports.
JPM shares fell 0.9% and C shares declined 3.1% Thursday. XLF includes a 10.6% tilt toward JPM and 6.4% in C.
“Not a huge reaction to earnings despite relatively healthy quarter out of the early reporters. The risk is similar to the second quarter in that stocks are being priced for perfection,” Bryan Reilly, senior investment analyst at CIBC Atlantic Trust, told Reuters. “But the strength in the global economy has accelerated and a weakening dollar should set up companies for very healthy beats in Q3.”
J.P. Morgan revealed net income of $6.73 billion, or $1.76 per share, compared to profits of $6.29 billion, or $1.58 per share, in the same period last year, the Wall Street Journal reports.
Citigroup announced net income of $4.13 billion, up 7.6% year-over-year, while earnings per share rose to $1.42, the WSJ reports.
On Friday, Bank of America (NYSE: BAC) and Wells Fargo (NYSE: WFC) will report earnings. XLF includes a 7.7% weight toward WFC and 7.9% in BAC.
Looking ahead, a number of factors could continue to support the financial sector. For instance, the Federal Reserve has expressed intention to raise rates, tighten monetary policy. Banks’ most basic profit-making business model is to take on deposits and issue loans, so jigher interest rates means higher rates on loans, which translates to improved profit margins.
Related: 3 Insurance ETFs for a Rising Rate Environment
Banks may also experience loan growth. To fuel an improving economy, business and Americans will borrow, and many may continue to take advantage of the current low-rate environment to borrow.
There is still the potential for Trump administration to push through deregulation and tax cuts. Beyond obvious effects of lower taxes on businesses, deregulation or scaling back of draconian post-financial-crisis Dodd Frank rules would help banks do more with capital or turn around a quicker profit.
Additionally, after latest stress test revealed banks are fully capitalized, banks are now in a position to increase share buybacks, which would shrink overall shares and add value to company stocks. The top four banks have been approved for $59 billion in share buybacks.
For more information on the financial sector, visit our financial category.