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Earnings Preview: Has Finance Sector Seen Post-Election Bump?

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December 22, 2016
Cash Machines: Financial Sector Earnings Outlook

So much can happen in a year. And sometimes, it’s not what market experts are expecting.

Last year at this time, the financial sector seemed primed for a recovery amid expectations the Federal Reserve would continue on a sure-but-steady path to raise interest rates in a timely fashion and help earnings at the nation’s banks and financial institutions.

Last December, the Fed had upped the federal funds rate 25-basis points to 0.25%-0.50%, the first hike in a decade, and had signaled that four more interest rate rises were on the 2016 horizon.  

And then the first quarter ended with no rate hike. Ditto for the second quarter, and again in the third. It was not until the final meeting of the year in mid-December that the the FOMC hiked fed funds rate a quarter point, and projected three similar hikes in 2017. But again, last year at this time the Fed projected there would be four quarter-point hikes in 2016, and we ended up with one.

The Trump Effect

Another unexpected event in 2016 was the election of Donald Trump as the next U.S. president, and the vote sent markets on the move. Since the election, the S&P 500’s (SPX) financial sector has turned markedly higher. Treasury yields moved higher as well, and some market analysts say inflation may cross the 2% threshold. Though the fundamentals of the nation’s largest banks didn’t change overnight with the election results, the implications of how a Trump administration might affect financial regulation, taxes, and trade have thus far been a positive for banks and financial institutions.

And the Fed has come through with another rate hike. Financials tend to reap the rewards of a rate increase through improved rate spread, or the difference between the rate at which the banks borrow and the rate they charge to those who borrow from them, their customers. It’s a double-edged sword to consumers, though, whose mortgage rates and credit-card rates rise. But then again, savings rates may rise as well.

Will Trump, who has spent decades dealing with banks in the private sector, keep true to his campaign promises to take a more hands-off approach to Wall Street regulation?

A possible deregulatory tailwind, coupled with a positive interest rate environment, has done much to boost the share prices of Bank of America (BAC), JPMorgan Chase (JPM), Wells Fargo (WFC), Morgan Stanley (MS) and Goldman Sachs (GS). Trump’s vow to pump spending into infrastructure also may be a boon to banks as they extend credit.

Already Reaping Reward from Volatility?

Analysts say that banks and financial institutions, both big and small, may already be seeing the benefits of steeper yield curves, which signal rapid economic expansion.  Higher long-term rates alone should help the big banks’ Q4 bottom lines, particularly for interest-rate sensitive banks like BAC. Some analysts have already upped their Q4 results from those in early November.

As in Q3 amid the post-Brexit vote volatility, MS and GS, among other banks with hefty investment-banking arms, may have gained from the heightened post-election volatility as investors adjusted their portfolios, analysts note. A strong Q4 finish has the potential to push those banks and others firmly to the plus-side of fiscal year earnings, according to analysts. We’ll get a fresh look when the banks report their Q4 earnings in January.

Some analysts warn that, going forward, a cloud of uncertainty still hangs. What Trump the campaigner pledged versus what Trump the president can deliver may not be clear. Economic growth through lending and lower corporate taxes could push bank profits higher, but these may take some time to implement and take effect.  

TD Ameritrade clients can get a visual view of the financial sector via a heat map in the thinkorswim® platform. (See figure 1 below.) The size of the square indicates the market cap of that company. With just a click, you can quickly access fundamentals, news, charts and more. 

Fin Sector Heat Map, Dec 2016

FIGURE 1: FINANCIAL SECTOR HEAT MAP.

To find this Heat Map in the platform, click MarketWatch > Visualize > Indices > S&P 500 > Financials. Image source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

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