Second-half guidance will be the key to deciding how attractive these stocks will be
For the first time since 2018, companies will report earnings against the backdrop of rising interest rates. That is lowering the expectations for corporate earnings that are already feeling the pinch of inflation. As is the market’s tradition, bank stocks will lead off earnings season. And although it’s a short trading week because of Good Friday, several of the “big banks” are set to report earnings this week.
But what will they report? And how may that affect the way investors position their portfolio for the second quarter and second half of the year. In this article, we’ll look at the risks and the opportunities and leave you with three bank stocks that may be worth a small investment.
A Very Different Economy
In assessing the risks for bank stocks, a tighter monetary policy tops the list. For much of the first quarter, it seemed as if the market and the Fed were playing a game of chicken. And with an initial interest rate increase of 25 basis points, you can’t blame investors for believing the Fed blinked.
But since that initial increase, the Fed is signaling that it will begin to raise interest rates more aggressively. Adding to the negative sentiment is the general consensus that a recession is coming at some point. That could reduce demand for credit and loans. Which would be a drag on bank revenues.
The banks themselves are adding to the bearish sentiment by announcing that expenses are likely to be higher for the rest of 2022. That would be a drag on margins.
On the Other Hand...
For all the concerns over what may happen, what is happening remains fairly bullish. For example, through mid-March the 25 biggest U.S. banks reported that borrowing rose for seven consecutive weeks. And at that point, loan balances were 5.8% higher than in 2021.
However, for this to continue would require economic momentum to remain strong. For now, the addition of new jobs suggests that the economy may still have a little growth remaining. If that continues, companies may have to shift from defense to offense. This could mean an increase in borrowing, despite higher interest rates.
With that said, some bank stocks may not be off the table. As with many sectors, quality will matter. And here are three that are likely to stand out.
JPMorgan Chase (NYSE: JPM) - JPMorgan reports before the market opens on April 13. The consensus estimates are for earnings of $2.69 per share and revenue of $31 billion. That bottom line number would be over 40% lower on a year-over-year basis. However, with a price-to-earnings (P/E) ratio of just 8.66 as of this writing, it may be fair to say that JPM stock is undervalued compared to the average P/E of the S&P 500. And if the rates on the 10- and 30-year Treasury notes continue to climb, the bank’s earnings may recover some in the second half of the year.
Morgan Stanley (NYSE: MS) - Morgan Stanley makes this list because most of its revenue comes from its asset management division. This reduces the bank’s exposure to credit risks. The bank reports earnings on April 14 and the consensus estimate is for earnings per share of $1.95. The bank has beat on earnings per share in each of the last seven quarters.
Wells Fargo (NYSE: WFC) - Unlike the first two bank stocks on this list, the WFC stock price is slightly higher for the year. The company is coming off a solid fourth-quarter earnings report. But this report is not expected to be as rosy. Earning per share are expected to come in at 81 cents down from $1.05 in the same quarter last year. Revenue will also come in a bit lighter at $17.8 billion as opposed to the $18.06 it delivered in the prior year. Wells Fargo reports on April 14 before the market opens.
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