A deluge of corporate earnings results and economic data due for release this week will test investors after the stock market’s latest record-setting rally.
Traders have been pricing in the likelihood of a rebound in corporate earnings to coincide with the recent batch of better-than-expected economic data. Another round of firming economic data is expected this week, with the effects of the latest round of fiscal stimulus and recent roll-back of more social distancing restrictions bolstering economic activity.
First-quarter corporate earnings likely benefited from this firming economic backdrop. Over the last several months, analysts have raised their aggregate S&P 500 earnings per share (EPS) estimates by a record 6.0%, according to FactSet data.
And first-quarter earnings season will kick off with quarterly reports from the big banks, which have seen some of the sharpest upward revisions to profit estimates. In fact, the financial sector saw the second-largest increase in bottom-up EPS estimates of all 11 sectors in the S&P 500, according to FactSet, coming second only to the energy sector. Financials’ EPS estimates were revised up by 13.1%, which marked the second-largest quarterly increase for the sector since FactSet started tracking the metric in 2002.
The rosier outlook for bank profits coincided with a sharp move higher in Treasury yields as expectations for economic growth increased. The benchmark 10-year Treasury yield has advanced by more than 70 basis points for the year-to-date, with highest interest rates helping to boost the income banks derive from their core lending businesses. The S&P 500 financials sector has gained more than 18% for the year-to-date, or double the return of the broader market of the broader market, as the recent rotation into cyclical shares with earnings levered to a strong economic rebound lifted banking stocks.
The banks reporting quarterly earnings results this week — including JPMorgan Chase (JPM), Goldman Sachs (GS), Wells Fargo (WFC) and Morgan Stanley (MS) – will likely already reflect a bottom-line boost from this higher-rate environment. Big banks’ first-quarter results will also likely get another boost from trading activity, given the stock markets record-setting rally and volatility in the bond markets so far this year. Fixed-income trading revenues already rose by the most in at least a decade across the bond trading divisions at Goldman Sachs, Citi, Morgan Stanley, JPMorgan and Bank of America last quarter, according to an Axios analysis.
However, with the latest rise in rates now well known and priced in by investors, the next leg higher for bank stocks will likely require a new driver, said Deutsche Bank analyst Matt O’Connor. And last week, cyclical sectors already lost some momentum, as steadying rates prompted a resurgence in technology and…
Read More: What to know this week