Since the beginning of this month, financial stocks have outperformed the S&P 500 Index, with investors awaiting the quarterly earnings reports from major banks to be released this weekend.
The Financial Select Sector SPDR Exchange-Traded Fund (XLF.US), which tracks financial stocks in the S&P 500 Index, performed as the "second-best industry ETF" last week, only behind the energy sector. Frank Cappelleri, founder of the independent research firm CappThesis, stated in a report on Monday, "It is once again approaching the recovery of its summer highs."
Last week, all three major U.S. stock indices rose, marking a fourth consecutive week of gains, due to the strong employment report released on Friday. Although the financial sector of the S&P 500 Index rose by about 1% last week, energy stocks surged by 7% due to the tension in the Middle East leading to an increase in oil prices.
In terms of corporate earnings, investors are preparing for the third-quarter earnings reports from JPMorgan Chase (JPM.US) and Wells Fargo (WFC.US), which are set to be released this Friday. The performance of these two large Wall Street banks will kick off this earnings season.
However, according to a report from DataTrek Research on Monday, the earnings "momentum" of the financial sector in the third quarter does not seem exciting. Wall Street analysts expect a year-over-year decline of 12% in bank performance, leading to a possible 0.4% decrease in profits for the entire financial sector compared to last year.
Nevertheless, Nicholas Colas, co-founder of DataTrek, pointed out in the report that the upcoming earnings season will remind investors that the U.S. large financial stocks represented by the Financial Select Sector SPDR ETF are "far more than just banks," with non-bank companies accounting for 76% of the financial sector. Therefore, the fundamentals of sub-sectors such as financial services, capital markets, insurance, and consumer finance are more important than loan growth and net interest margins.
DataTrek believes that large financial stocks are a diversified way to bet on the continued growth of the U.S. economy and continues to be optimistic about this type of stock as an investment in a "mid-term market theme." Colas emphasized that bank earnings reports are usually the early part of the earnings season and only reflect a small part of the financial sector's story. The rest of the financial sector's sub-industries are expected to achieve year-over-year profit growth.
As of the trading level on Monday afternoon this week, the overall performance of the U.S. stock market in 2024 has been strong, with the S&P 500 Index up more than 19% year-to-date, and the performance of the financial sector is similar.
According to FactSet data, most of the 11 sectors of the S&P 500 have shown a downward trend so far this month. Although the financial sector has declined, its performance is still better than most other industries. As of Monday afternoon this week, the financial sector of the S&P 500 has fallen by 0.9% since the beginning of the month, while the energy sector has risen sharply by 6.5% this month against the backdrop of escalating tensions in the Middle East. In contrast, the S&P 500 Index has fallen by 1.3% so far this month.