Bank stocks and financial companies — a major contributor to S&P 500 earnings — are queueing to report for the third quarter after the Federal Reserve jumped into its rate-cutting campaign in September.
The IBD earnings calendar shows Wells Fargo, Bank of New York Mellon, commonly known as BNY, JPMorgan Chase and BlackRock are due on Friday.
Bank earnings season continues next week: Bank of America, Citigroup and Goldman Sachs report on Tuesday. Morgan Stanley wraps things up for the big banks on Thursday.
S&P 500 Earnings: Bullish Q3 Outlook
In a note to clients on Monday, Ed Yardeni of Yardeni Research called S&P 500 operating forward earnings per share "the best leading economic indicator," one that captures analyst consensus estimates for index constituents during the current year and coming year. While this leading indicator doesn't anticipate recessions, it is available weekly and "closely tracks actual quarterly S&P 500 operating EPS," he said.
And, he added, it is flashing bullish signals ahead of another S&P earnings season: "Forward earnings rose to a record high during the Oct. 3 week. It dipped during (the) second half of 2022, bottomed in early 2023, and has been rising to record highs since late 2023."
Further, "we are still targeting at least 8,000 (for the S&P 500) by the end of the decade," Yardeni said. It's currently around 5,733, up more than 20% year to date, and 6% off September's interim lows.
Fed Rate Cuts May Fuel Bank Earnings
The outlook for banks, however, is somewhat less bullish. For Q3, analysts expect the overall financial sector to report a 0.4% earnings decline vs. a year ago, according to FactSet. They see banking companies leading that decline.
But in a note to clients on Monday, a Bank of America analyst team called the Fed's emerging rate-cutting cycle a positive for U.S. banks. "Rate cuts that lead to rebounding customer activity and a positively sloping yield curve (are) structurally bullish" for bank stocks, they said. That rebound would drive "positive EPS revisions and a further re-rating higher in bank stock valuations."
The analysts added they prefer regional banks on potential to defend net interest income. Among the money-center banks, they forecast Morgan Stanley and Goldman Sachs would benefit most from a potential rebound in investment banking, driving positive earnings revisions.
BK Stock Pegs New 52-Week High
Across 40 banks covered by the analysts, investor sentiment for BNY is "unmatched," they wrote. Under new CEO Robin Vince, the oldest U.S. bank has tapped growth areas like real-time payments and artificial intelligence, diversifying beyond its traditional custodian business.
As a result, BK stock is breaking away from the "penalty box," the Bank of America team said.
Among money-center banks, BNY earns the highest RS Rating: 92 out of a best-possible 99, according to MarketSurge charts. The bank stock gained 1.1% to 73.20 on the stock market today. It is far extended from a 58.27 buy point cleared in May, pegging a fresh record high on Tuesday.
Shares been trading tightly ahead of the bank's earnings report, grinding about 2% higher in the past four weeks. Year to date, BK stock has jumped more than 40%.
Bank Stocks Brace For Upcoming Elections
In November, the presidential election results could drive sharp moves among bank stocks, the Bank of America team warned.
They wrote: "A (Donald) Trump win likely seen as positive for relief on the regulatory and M&A fronts." Whereas a Kamala Harris-led Democratic sweep could be the "most negative outcome," raising the specter of higher taxes and more regulatory upheaval.
For now, bank stocks remain under-owned due to macroeconomic uncertainty, their data show.
Please follow Aparna Narayanan on X @IBD_Aparna for more stock market coverage.
