It’s earnings season again and that means an avalanche of updates are coming from the financial services sector. On Tuesday alone, Dow component JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) deliver third-quarter results.
That means the Financial Select Sector SPDR (NYSEArca: XLF), the largest financial services ETF, and rival funds should be spending plenty of time in the spotlight over the next couple of weeks.
“After getting walloped by investors in the last quarter of 2018, financial stocks have generally rebounded in 2019, despite the Federal Reserve’s dovish turn,” reports Ben Walsh for Barron’s.
Rates plunged on a combination of loosening Federal Reserve monetary policy and demand for safe-haven assets over the third quarter. Investors are also betting on further interest rate cuts going forward, and some warn of ongoing risks that could shift sentiment toward safe assets as well.
Banks depend heavily on net interest income or difference between the rates charged on long-term loans and the rates paid out for short-term borrowing. However, the spread diminished as rates on long-term debt plunged toward record lows.
What Earnings Estimates Say
“Analysts expect Citigroup to report $1.95 in earnings per share and $18.5 billion in revenue,” according to Barron’s. “The consensus is for JPMorgan Chase to deliver earnings per share of $2.45 and $28.5 billion in revenue. From Wells Fargo, Wall Street expects earnings of $1.23 a share and $21.1 billion in revenue, according to FactSet.”
Market observers have previously warned that Wall Street banks could face pressure as tepid market volatility could have contributed to more muted trading desk activity. Furthermore, the Federal Reserve has signaled its intentions to cut interest rates, which would further hurt the banking industry’s ability to generate profits from lending.
Upcoming earnings calls could bring more commentary on how lower interest rates are affecting banks’ margins. On a related note, it’s possible the Federal Reserve again lowers rates later this month, potentially bringing fresh pressure to those margins.
With the capital markets possibly expecting a cut in interest rates, could this affect banks’ lending businesses to the point where they suffer? Some analysts question whether the sector strength can continue through the rest of 2019. During second-quarter earnings season, banks frequently guided lower on net interest margins.
For more information on the financial sector, visit our financial category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.