WFC - Q3 Financials Sector Earnings Outlook: Tough Times Continue For Bank Stocks But Some Signs Of Life | Benzinga
The last Wall Street bear market ended nearly a year ago and a new bull market began in June, though it’s flagging. But one prominent sector hasn’t participated, raising numerous eyebrows as earnings season approaches.
Whichever sector index you choose, all show the same thing: Bank stocks remain down year over year even as the broader market is up about 17%. From mid-October 2022 through early October 2023 period, the S&P Banks Select Industry Index () fell 18%.
"This is the first time in nearly 100 years that the market is off a major low for this long and the banks are still down,” said Kevin Gordon, senior investment strategist at Schwab.
It’s unusual not just because it’s been so long since a similar scenario but also because banks often lead rallies off of major lows. A bull market in stocks generally reflects a robust economy, and a healthy economy shows up in the banking industry because more consumers and businesses borrow to expand or upgrade their homes or factories, there’s more hiring that leads to more investing, and new companies launch shares on Wall Street to participate in the growth. All this activity tends to help banks, at least in a normal recovery.
The fact that bank stocks aren’t up despite economic growth, which some economists peg near 3% for Q3, is puzzling and suggests that perhaps the growth we’re seeing isn’t wide in scope or lifting all boats equally.
Most of the biggest U.S. banks aren’t exceptions to the general downturn in the financials sector, and they begin their quarterly reporting period this Friday, October 13, when JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C), and Wells Fargo (NYSE: WFC) are expected to open their books to investors. Goldman Sachs (NYSE: GS) and Bank of America (NYSE: BAC) are expected to report October 17, followed by Morgan Stanley (NYSE: MS) October 18.
"Loan loss provisions, revenue growth, and lending standards are key to watch,” Schwab’s Gordon said.
Loan loss provisions are funds banks put aside in case loans go bad and detract from earnings. They’ve been a near-constant drag on bank results since banks began adding to them during the pandemic.
Headwinds from all sides
The atmosphere ahead of Q3 bank earnings is very different than it was heading into Q2 reporting season three months ago. At that point, the overall market had been climbing for a month, and investors generally felt bullish. There was growing belief that the Federal Reserve was nearing the end of its rate hikes and that cuts could come as soon as early-to-mid-2024, giving the economy and companies an additional boost.
This month, the benchmark 10-year Treasury note (TNX) yield topped 4.8% for the first time since late 2007, up from spring lows near 3.3%. The Fed projects rates remaining higher for longer into 2024, and worries are growing that an extended period of high borrowing costs could put banks under more pressure as old loans expire and customers flinch at new, more onerous rates. Housing sentiment also suffered recently as the average 30-year mortgage approached 8%, which could hurt banks in the home and mortgage loan businesses. Mortgage applications fell to ...