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S&P 500 Financial Stocks Reach Summer Highs as Investors Await Key Bank Earnings

Mike Cianciabella | October 8, 2024

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

The financial sector of the stock market is demonstrating robust performance, showing resilience as it approaches summer highs. This comes at a pivotal moment as investors eagerly anticipate quarterly earnings reports from major banking entities, including JPMorgan Chase & Co. and Wells Fargo & Co., scheduled for release later this week.

According to DataTrek Research‘s co-founder Nicholas Colas, the financial sector encompasses a broad range of entities, extending beyond just traditional banks. As evidence of this sector’s current strength, the Financial Select Sector SPDR ETF (XLF), which tracks financial stocks in the widely acclaimed S&P 500 index, was noted to be the second-best performing sector ETF last week, trailing only behind energy-related stocks.

Market Trends and Recent Performance

In the past week, all three major U.S. equity indices experienced gains, marking four consecutive weeks of increases. A stronger-than-expected jobs report released on Friday contributed to this positive sentiment. Notably, the financial sector within the S&P 500 rallied approximately 1% last week, showcasing its outperformance compared to the overall index, which has dipped slightly in October.

The financial sector has shown a slight drop of 0.5% in October thus far; however, it still outperforms other sectors that are generally trading down this month. Meanwhile, energy stocks surged by roughly 7% due to escalating geopolitical tensions in the Middle East impacting oil prices.

Upcoming Earnings Reports and Expectations

As we head into the earnings season, attention is focused on the performance of JPMorgan and Wells Fargo. The third-quarter earnings reports for these financial giants are anticipated to start rolling out on October 11. However, the mood surrounding the upcoming earnings season appears to be somewhat tempered, as a note from DataTrek suggests a modest decline of 0.4% in Bank earnings year-over-year.

The broader financial sector is expected to underperform specifically bank results, particularly due to predicted declines of around 12% in bank earnings. Despite this, Colas emphasizes that the upcoming earnings reports offer a crucial reminder that the U.S. large-cap financial sector represented by the XLF is much more than just banks.

Understanding the Financial Sector Composition

The financial sector is a diverse grouping of companies, with banks only representing a fraction of the whole. According to DataTrek’s analysis, the breakdown of subsector weights is as follows:

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

Colas pointed out that about 76% of the financial sector consists of non-bank sectors, which adds significant importance to the fundamentals of subsectors such as financial services, capital markets, insurance, and consumer finance. This diverseness allows investors a pathway to play into mid-cycle economic growth through large-cap financial stocks.

Viewpoints and Outlook

Despite the anticipated declines in bank earnings, DataTrek remains optimistic about the financial sector as a whole. Colas noted that while bank earnings are critical, they only represent a small component of the overall financial landscape. The rest of the subsectors are likely showing year-over-year earnings growth, reinforcing the argument of the sector’s intrinsic value beyond traditional banking.

The broader U.S. stock market has witnessed impressive gains this year, with the S&P 500 surging approximately 19.4% in 2024. The financial sector has closely mirrored this trend, with a year-to-date gain of about 19.8%, showcasing a healthy outlook amidst the intricacies of earnings seasons.

As the market braces for the upcoming earnings, the dynamics of the financial sector will be closely monitored, not just for the outcomes of bank reports but for the broader implications across its diverse subsectors. In conclusion, while the focus may narrow on earnings from banking institutions, investors are reminded of the sector’s broad composition and its potential role in a thriving U.S. economy.