November 5, 2024

Why Financial Stocks Are Set to Soar This Fall: What to Watch Ahead of Bank Earnings

S&P 500’s Financial Stocks Near ‘Summer Highs’ Ahead of Bank Earnings

Positive Momentum in the Financial Sector

The financial sector is showing promising signs as it approaches its summer highs, buoyed by anticipation surrounding quarterly earnings from major banks. As we prepare for the financial earnings reports this week, particularly from JPMorgan Chase & Co. and Wells Fargo & Co. on October 11, it’s essential to analyze the broader landscape of the financial sector, which goes beyond just banking.

Recent insights from Nicholas Colas of DataTrek highlight that while investor sentiment fluctuates, the Financial Select Sector SPDR exchange-traded fund (XLF) has emerged as a strong performer, coming in as the second-best sector ETF last week, just behind energy. It is crucial to remember that the financial sector plays a pivotal role in the overall economy, and its health is not solely dependent on bank profits.

Market Performance Leading Up to Earnings

Last week was positive for the U.S. equities markets as all three major indexes recorded a fourth consecutive week of gains, largely fueled by a stronger-than-expected jobs report released on Friday. Specifically, the S&P 500’s financial sector rallied approximately 1% last week, a testament to the resilience and underlying strength of this sector. Conversely, energy stocks saw a remarkable 7% surge, driven by concerns over oil supply amid increasing tensions in the Middle East.

While the upcoming earnings season may not appear particularly exhilarating, with analysts projecting a slight 0.4% decline in earnings for the third quarter largely due to a projected 12% drop in bank results year over year, the focus should remain on the broader sector. Colas reminds us that the financial sector encompasses much more than banks; non-banking elements account for approximately 76% of the financials group.

The Composition of the Financial Sector

A closer look at the subsectors reveals a diversified financial landscape:

  • Financial services: 32%
  • Banks: 24%
  • Capital markets: 23%
  • Insurance: 17%
  • Consumer finance: 4%

Colas views large-cap financials as a solid investment that acts as a “diversified call” on sustained U.S. economic growth. As traditional financial principles uphold their value, the financial sector remains an effective vehicle to play the mid-cycle market theme. While it’s easy to fixate on bank earnings early in the reporting season, it only tells a fraction of the story concerning the financial sector’s performance.

Year-to-Date Gains in Context

Despite recent fluctuations, the U.S. stock market has demonstrated solid growth in 2024 thus far, with the S&P 500 soaring approximately 19.4% this year. Notably, the financial sector has slightly outperformed this benchmark, boasting a year-to-date gain of 19.8%.

However, as October unfolds, the S&P 500’s financial sector has seen a minor decline of 0.5% thus far this month. This is commendable, considering the broader context where nearly all sectors in the S&P 500 have encountered downturns. The energy sector, meanwhile, has skyrocketed, reflecting a 6.5% increase, as investors remain wary of geopolitical risks impacting oil supplies.

Concluding Thoughts

In times of market volatility and global uncertainty, a solid entry into the financial market can serve as both a prudent investment and a hedge against broader economic risks. The financial sector is essential not just due to its banking elements but for the comprehensive array of services it supports.

As we await JPMorgan’s earnings report, it’s important for investors to view the larger picture. This sector’s performance will be a critical indicator of economic robustness and a reflection of financial health across various subsectors. The impending earnings reports may not be a revelation of vitality, but they will remind us that the financial sector is anxious to grow and evolve beyond just its bank counterparts. Steady hands and smart investments in the financial space will yield substantial returns in a market poised for continued growth.

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