SP 500 Earnings: Like Financial Sector Longer-Term

The big banks start reporting their Q3 ’17 earnings tomorrow, Thursday, October 12th, 2017 and regardless of what the results look like for JP Morgan (JPM), Citigroup (C) or the Friday releases, I do like the sector longer-term for clients and readers.

There is very little “froth” in the banking sector, although credit spreads are nearing 2007 tights. That is my one and only worry, but bank capital seems sufficient given that banks are holding more capital against less risk, the risk profiles of the institutions are far lower than last decade, (certainly less leverage), the housing market is still pretty subdued from a lending and price appreciation perspective, and management’s are still cowed and have lived through both the Financial sector equivalent of the Great Depression in 2007 and 2008, and the regulatory overkill that followed.

Schwab remains one of clients top 5 holdings given their asset-gathering prowess and their advisor network (of which I am a part). Full and fair disclosure, all clients custody their assets at Charles Schwab and I’ve yet to hear a complaint about the custodian or a preference for another major custodian like a TD Ameritrade or Fidelity.

Financial sector earnings estimates: 

Here is how the Financial sector “estimates” fall out for the next 5 quarters:

  • Q3 ’18: 26.5% y/y growth expected as of 10/6 vs 18% as of 10/1/17
  • Q2 ’18: 9.7% y/y growth expected as of 10/6 vs 15.5% as of July 1 ’17
  • Q1 ’18: 9.8% y.y growth expected as of 10/6 vs 10.8% as of July 1 ’17
  • Q4 ’17: 15.8% y/y growth expected as of 10/6 vs 16.5% as of July 1 ’17
  • q3 ’17: -6.2% y.y growth expected as of 10/6 vs 6.4% as of July 1 ’17 (hurricane related write-downs occurred last week. Clients only insurance holding is Berkshire Hathaway.)

Source: Thomson Reuters This Week in Earnings dated October 6 ’17

While some downward pressure on earnings estimates is expected, the next 3 – 4 quarters could be strongest rate of year-over-year earnings growth for the sector in years – since 2007, 2008.

Finally, the Financial sector valuations seem very reasonable: good dividend yields and with the potential defanging of CCAR, better dividend payouts and share repurchases, and reasonable P.E ratio’s particularly amongst the big banks help.

There is no question Financial’s seem to outperform when rates are rising and the yield curve is steeper: 2013, late 2016 after Brexit and the US Presidential election, and again in late 2017 are 3 periods where higher rates and a steeper yield curve correlated with Financial sector outperformance.

As a caveat to readers and investors, the sector does go through dormant stretches where there is little upside and little outperformance. Faster revenue growth, higher interest rates, a better yield curve, maybe even some inflation could spark a sustained rally in the sector.

The sector looks poised to exit probably its worst bear market ever – remember banks weren’t deregulated until the mid-1980’s. The sector was more akin to public utilities for most of its existence.

Financial sector earnings are usually the first sector to report and then completely finish, so the numbers will be updated again in mid-November ’17.

I’ll make a note of it.

Thanks for reading.





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