Banks should shine among S&P 500 stocks this earnings season

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Get ready, investors: Large U.S. banks are in the best shape they have been in for 30 years, this head of value equity says

Surprise: Analysts expect banks to be one of the brighter areas of the stock market during an overall dismal earnings season.

A complicated setup There are many moving parts to the earnings outlooks. Years of stock buybacks have boosted EPS , but some companies now may wish to curtail buybacks given high share prices. Trade tensions with China have had an obvious effect on the technology sector. A strengthening dollar pressures commodity prices.

So Oppenheimer analyst Chris Kotowski expects large U.S. banks’ net interest margins to compress through 2020. At the same time, he and Wells Fargo senior global equity strategist Scott Wren expect a continued good run for financial stocks because of their relatively low valuation and their combination of increasing dividends and share buybacks.

Five years ago, the S&P 500 banks as a group traded at a weighted forward price-to-earnings ratio that was 72% of the valuation for the full index — a typical level. Now the group trades at a forward P/E valuation 60% of the full index. So the discount has gotten significantly greater even as financial companies’ EPS growth is expected to lead all sectors.

During an interview on July 9, Koontz emphasized the banks’ tremendous investment in new technology, which “allows them to increase their footprint without expanding their branch networks significantly.” For Capital One, the year-earlier EPS figure was boosted by a net gain of $400 million on the sale of most of its consumer home loan portfolio. The company’s adjusted EPS for the second quarter of 2018 was $3.22.

 

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