The financial sector is ‘a lot more than just banks,’ DataTrek’s Nicholas Colas says ahead of JPMorgan’s results, expected on Friday
The S&P 500’s financial sector is up almost 20% so far this year.
Financial stocks are faring better than the S&P 500 so far this month, as investors await quarterly earnings from big banks to start rolling out later this week.
The Financial Select Sector SPDR exchange-traded fund, which holds financial stocks in the widely followed S&P 500 index, was the “second-best sector ETF last week” behind energy, Frank Cappelleri, founder of independent research firm CappThesis, said in a note Monday. “It’s once again close to reclaiming its summer highs,” he said.
All three major U.S. equities benchmarks rose last week, each booking a fourth straight week of gains following a stronger-than-expected jobs report released on Friday. While the S&P 500’s financial sector rallied around 1% last week, energy stocks surged 7% as investors considered risks to oil amid bombardments in the Middle East.
On the corporate-earnings front, investors are gearing up for JPMorgan Chase & Co. and Wells Fargo & Co. tokick off third-quarter earningsresults for major Wall Street banks on Oct. 11.
The financial sector doesn’t appear “especially exciting” in terms of earnings “momentum” in the third quarter, according to a DataTrek Research note emailed Monday, which showed Wall Street analysts anticipate a slight decline of 0.4% from last year due to an expected 12% drop in bank results year over year.
But the upcoming earnings season “will offer up a useful reminder” that the U.S. large-cap financials sector, as represented by the Financial Select Sector SPDR ETF, is “a lot more than just banks,” DataTrek co-founder Nicholas Colas said in the note.
“Non-banks are 76 percent of the financials group, so the fundamentals underpinning” its subsectors — including financial services, capital markets, insurance and consumer finance — “matter much more than what’s going on with loan growth and net interest margins,” Colas said.
His note showed the breakdown of the subsector weights:
Financial services: 32%
Banks: 24%
Capital markets: 23%
Insurance: 17%
Consumer finance: 4%
DataTrek views large-cap financials “as a diversified call on continued U.S. economic growth” and still likes the group of stocks “as a way to play our mid-cycle market theme,” Colas said.
“Just remember that bank earnings, which are always early in a reporting season, only tell a small part of the story about this sector,” he said. “The rest of the group should show year over year earnings growth.”
The U.S. stock market is up in 2024, with the S&P 500 soaring 19.4% so far this year through Monday. The index’s financial sector has a slightly bigger year-to-date gain of 19.8%, according to FactSet data.
Nearly all the S&P 500’s 11 sectors are trading down this month through Monday, including a decline for the financial sector — although it was faring better than most.
The S&P 500’s financial sector has fallen 0.5% this month through Monday, while energy has posted a big 6.5% jump over the same stretch amid escalating tensions in the Middle East. By comparison, the S&P 500, a gauge of U.S. large-cap stocks, has dropped more than 1% so far in October, according to FactSet data.
All three major U.S. equities benchmarks closed lower Monday, with the S&P 500 falling 1%, the Dow Jones Industrial Average declining 0.9% and the Nasdaq Composite retreating 1.2%.
Energy was the sole sector in the S&P 500 that rose Monday, ending the trading session with a modest gain of 0.4%, according to FactSet data. The S&P 500’s financial sector closed sharply lower Monday, dropping 1.2%.
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