Please ensure Javascript is enabled for purposes of website accessibility

What to Expect from Bank Stocks After Earnings

Banks kick off third-quarter earnings season this week. Judging by the last two earnings seasons, that could be good news for bank stocks.

Third-quarter earnings season starts this week, and as usual, the banks are up first. Like the rest of my Cabot Wealth colleagues, I try not to predict earnings results. But I can tell you how bank stocks have performed after earnings the last few quarters.

In mid-April, after all the major U.S. financial institutions had reported first-quarter results, bank stocks (as measured by the Financial Select Sector SPDR ETF (XLF)) rose 4.4% in 10 days. Three months later, in mid-July, bank stocks responded to second-quarter earnings by jumping 2.4% in three weeks. In other words, an index that’s up roughly 13% in 2017 has achieved more than half those gains in about a month’s span during the two earnings seasons.

[text_ad]

Here’s what those jumps look like on a chart:

Bank stocks have twice gotten nice earnings-season bumps this year.

It’s no mystery why financial stocks have performed well after earnings this year. The six largest U.S. banks have beaten consensus analyst estimates by an average of 9.4%. According to Yardeni Research, that’s a significantly higher than the 6.3% beat rate among S&P 500 companies in the first two quarters.

A third straight quarter of better-than-average earnings surprises could further extend what is now a month-long rally in bank stocks. From a technical standpoint, the circumstances surrounding financial stocks entering the last two earnings seasons were different. In April, U.S. banks were bottoming after a big run-up to start the year. In July, bank stocks were in the midst of a two-week basing period following a big June rally.

This time around, bank stocks have gone nowhere but up for a whole month, jumping more than 9%. So it’s possible that another round of earnings beats could already be baked into the cake for financials. That said, if the banks again set a strong early tone to earnings season, it could lift all boats in the midst of a red-hot stretch for the stock market.

Regardless of what happens in the next week, the long-term outlook for financial stocks is decidedly bullish. Crista Huff, chief analyst of Cabot Undervalued Stocks Advisor, has been recommending U.S. banks for months, and added a large bank stock to her portfolio over the summer.

Here’s what she wrote to subscribers about the stock in her most recent issue:

Corporate tax rates might fall from 35% to 20%, significantly boosting banks’ earnings per share. An additional boost would follow from the increased business activity that typically accompanies tax cuts.

“Banks essentially thrive when the economy is booming. Booming economies tend to spur increases in inflation and interest rates, which in turn increase banks’ lending activity, fee income and net interest margin on personal and business loans and credit card balances.”

The bank Crista just recommended is a major beneficiary of that trend, and features a perfect blend of earnings growth and value. If you want to know the name of the stock, click here.

In the meantime, keep a close eye on bank earnings results this week and next. Another good quarter could add even more momentum to a hot sector.

[author_ad]

Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week and Cabot Value Investor .