Big banks are leading the way into earnings season, and Wall Street is on close watch.
Last quarter was softer than expected for most of the country's largest financial companies, which were still feeling the pain from the stock market's late-2018 sell-off. But this time, experts are cautiously optimistic on what the next quarter will bring.
Here's what five market watchers will look for as the major banks begin to report on Friday:
Sarat Sethi, managing partner at Douglas C. Lane and Associates, says bank stocks look particularly appealing here compared with the rest of the market:
"The banks, I think, are going to do well because they're actually at a much lower valuation than the rest of the market. [Banks] have been dead money for a long time. But if you look at where they are price-to-book, look at it on a [price-to-earnings] basis, look at it on a well-capitalized basis, […] I don't know if now is the moment, but I think you want to be there. Because when they do start doing well, ... the balance sheets are so much better than they were back in '09."
Paul Hickey, who is head portfolio manager at Bespoke Investment Group, likes ones particular name in the group:
"Two weeks ago, when everyone was freaking out about the yield curve inverting, ... the financials dropped 10% in five days. [The] S&P 500 was down 1%. That kind of underperformance in such a short period of time is very rare for the sector. Goldman [Sachs], when those periods [have] happened, has averaged a gain of 20% over the next three months, with gains 75% of the time. [It] trades at a much cheaper valuation to its peers. The 1MDB scandal, that's weighing on it, but the move into the consumer sector provides a much more stable potential revenue stream for the company. [...] Again, the sentiment towards the sector is weak, and that's the best time to be going long in these names — when other investors don't want them."
Nuveen's head of global equities research, Stephanie Link, whose largest position is in Bank of America, predicts the banks will start to see an upturn after December's market carnage:
"I think the theme is going to be capital markets have seen a recovery. January, February was terrible — we knew that — but March really did improve substantially, and I think that that's what people are going to kind of hold their hat on and hope that that actually will continue. I believe it will continue in terms of the activity in capital markets. I also think you're going to hear the rhetoric around mortgages actually increase as well given the great application data that we've seen over the past month, and I think that that is actually not in the stocks at all. And I think Wells Fargo actually should fare pretty well. Of course, we know what's going on with Wells Fargo in terms of the management change. We have to wait for that stock to really do much. But I do think that the cost-cutting story is still very much front and center. After earnings, then you're going to get CCAR and I think people will start to get excited about that. [...] Bank of America is a separate story because it's a cost-cutting story, an operational efficiency story, operating leverage story. And, by the way, Bank of America did have the best quarter out of the big five last quarter."
Deutsche Bank's Binky Chadha, who is the firm's chief U.S. equity and global strategist, agrees with Link on the banks' recovery:
"I am overweight banks, and I would argue that the main issue here is global growth and whether it will turn around, and whether we've found a bottom, basically, for rates. And I would check the box and bet on both. ... In terms of what we're looking to hear and understand is we know how the early part of the quarter went for the banks, but I would argue that's pretty well in the estimates. The question is whether the latter part of the quarters started to turn around, basically, in activity."
Veteran bank analyst Mike Mayo, head of U.S. large-cap bank research at Wells Fargo Securities, might be the most bullish of the group:
"You have the greatest earnings stability in over two decades. You have the strongest balance sheet in decades. [...] Every quarter, every year, every few years, 'the banks don't mess up' is another justification for revaluation of bank stocks. So, for the first time in my career, going into this year, we recommend all five of the wholesale banks. They're Citi, Bank of America, J.P. Morgan, Goldman Sachs and Morgan Stanley. Our favorites are Citigroup and Morgan Stanley. First time ever. The industry's doing fine even with this justified look-back."
Disclosure: Bespoke Investment Group does not own shares of Goldman Sachs but Paul Hickey does personally.
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