Since the start of this month, financial stocks have outperformed the S&P 500 Index as investors anticipate the upcoming quarterly earnings reports from major banks. The Financial Select Sector SPDR ETF (XLF, Financial) has been the second-best performing industry ETF, trailing only the energy sector. According to independent research firm CappThesis, the fund is approaching its summer highs.
Last week, all major U.S. stock indices recorded gains for the fourth consecutive week, buoyed by a strong employment report. Although the S&P 500's financial sector rose approximately 1% during this period, the energy sector surged by 7% due to increased oil prices amid Middle East tensions.
Investors are gearing up for the third-quarter earnings reports from JPMorgan Chase (JPM) and Wells Fargo (WFC), expected soon. These reports will set the tone for the earnings season. However, a report from DataTrek Research indicates that financial sector earnings momentum in Q3 appears lackluster. Wall Street analysts expect a 12% year-over-year decline in bank earnings, leading to an overall 0.4% dip in the financial sector's profits compared to last year.
Nonetheless, according to Nicholas Colas, DataTrek's co-founder, the upcoming earnings season will underscore the diversity within U.S. large-cap financial stocks, represented by the XLF ETF. While banking is only a fraction of the financial story, non-bank entities comprise 76% of the sector. Thus, fundamentals in financial services, capital markets, insurance, and consumer finance hold more significance than loan growth and net interest margins.
DataTrek advocates that investing in large financial stocks offers a diversified approach to betting on continued U.S. economic growth, viewing them as a mid-term market theme. Colas emphasizes that bank earnings, typically the first to be released in the earnings season, represent just a small segment of the financial sector's narrative, with other subsectors expected to post year-over-year profit growth.
As of recent trading levels, the U.S. stock market in 2024 shows robust performance, with the S&P 500 up over 19% year-to-date, and financial stocks exhibiting similar trends. FactSet data reveals that most of the S&P 500's 11 sectors have declined so far this month, with the financial sector down 0.9% yet outperforming most others. Meanwhile, the energy sector has surged 6.5% amid escalating Middle East issues, while the S&P 500 overall has fallen by 1.3% this month.
