Can Banks Get Their Mojo Back?

Bank stocks have lost some of their post-election sheen, with the industry lagging the S&P 500 index in the year-to-date period, particularly since the market’s March 1st peak.

The Zacks Major Banks industry, which includes all the money-center banks and big regionals like JPMorgan (JPM – Free Report) and PNC Financial (PNC – Free Report) that kick-off the Q1 earnings season for the industry on Thursday April 13th, is up only +0.8% vs. the +5.2% gain for the S&P 500 index in that time period. JPMorgan shares are barely in positive territory this year (up +0.3%), effectively losing all of their +8.4% gain since the start of the year through March 1st. We should keep in mind however that bank stocks are still up big since election day, with the Zacks Major Banks industry up +23.6% since November 8th (JPM shares are up +22.5% in that same time period).

The recent pullback is solely a function of policy uncertainty out of Washington, with market participants tempering expectations for tax and regulatory reform in the wake of the healthcare standoff. This reaction likely makes sense. But we do want to point out that the overall backdrop for this industry remains very favorable, particularly given the Fed’s monetary policy stance. Treasury yields have been modestly trending lower lately, with the Syrian airstrikes and the mixed March jobs report likely adding to the trend a bit. But the market appears comfortable with the Fed’s rate hike outlook, which should keep the overall interest rate trend favorable for the banks.

It is primarily this interest rate development that has driving analysts to raise their estimates for bank stocks. These positive estimate revisions aren’t that notable for the March quarter, but they are significant for the second half of the year and next year.

The chart below shows the stock price performance of the Zacks Major Banks industry (dark blue line) and how aggregate annual earnings estimates for the space have evolved lately. The notable element in this chart is the evolving picture for 2018 estimates (the red line with an arrow above it). As you can see, estimates for 2017 have moved up as well, but the same for 2018 have notably turned around.