As the earnings season kicks off with big Wall Street banks, investors should look to financial sector-specific exchange traded funds.
On Friday, JPMorgan Chase & Co (NYSE: JPM) and Citigroup Inc (NYSE: C) are expected to post roughly 20% and 30% declines, respectively, in profits for the same quarter year-over-year, while Bank of America Corp’s (NYSE: BAC) profits will be 20% higher when it reports on January 19, Reuters reports. Additionally, Wells Fargo & Co (NYSE: WFC), which reports on Friday, is projected to show a 67% jump in profits.
Market observers have attributed the mixed performance among the big banks to the varying pace at which banks began reversing accounting charges for pandemic-related loan losses, which have not materialized. Additionally, complicating factors like restructuring costs and asset sales at Citigroup and Wells Fargo have added to the differing earnings estimates.
Meanwhile, Goldman Sachs Group Inc (NYSE: GS) and Morgan Stanley (NYSE: MS) are projected to report fourth-quarter profit pullbacks of around 7% and 2%, respectively, after revenue from fixed income trading income dipped below exceptional levels.
The Financial Select Sector SPDR (NYSEArca: XLF), the largest financial sector-related ETF by assets under management, includes a 10.9% tilt toward JPM, 7.8% in BAC, 4.8% in WFC, 3.3% in MS, 3.0% in GS, and 2.9% in C.
Nevertheless, the broader sector outlook remains positive, and analysts expect bank executives will maintain an optimistic outlook for core earnings ahead.
“If investors look under the hood, there is much good to be seen,” Odeon Capital Group analyst Dick Bove wrote in note.
For instance, operating profits are projected to increase as the ongoing economic recovery bolsters loan growth and as yields from banks’ Treasury securities rise, or at least held steady, during the quarter with a rising rate outlook.
“A late pick-up in loan growth in 4Q, coupled with a recent rise in interest rates bode well for bank (guidance) on net interest income in 1Q22 and for the full year,” Deutsche Bank analyst Matt O’Connor said in a note.
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