S&P 500's financial stocks near 'summer highs' ahead of bank earnings this week

By Christine Idzelis

The financial sector is 'a lot more than just banks,' DataTrek's Nicholas Colas says ahead of JPMorgan's results, expected on Friday

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 XLF, which holds financial stocks in the widely followed S&P 500 index, was "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. (JPM) and Wells Fargo & Co. (WFC) to kick off third-quarter earnings results for major Wall Street banks on Friday.

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, with Wall Street analysts looking for 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 more than 19% so far this year based on Monday afternoon trading levels. The index's financial sector had a similar gain year to date, according to FactSet data, at last check.

Most of the S&P 500's 11 sectors are trading down so far this month, including a decline for the financial sector as of Monday afternoon - although it was faring better than most.

The S&P 500's financial sector was down 0.9% month to date on Monday afternoon, while energy was posting a big 6.5% jump so far in October amid escalating tensions in the Middle East. By comparison, the S&P 500, a gauge of U.S. large-cap stocks, has fallen 1.3% this month based on Monday afternoon trading levels, according to FactSet data, at last check.

All three major U.S. equities benchmarks were down Monday afternoon, with the S&P 500 SPX falling 1.1%, the Dow Jones Industrial Average DJIA declining 1.2% and the Nasdaq Composite COMP retreating 1.2%.

Energy was the sole sector in the S&P 500 trading up in afternoon trading, with a modest 0.3% gain, according to FactSet data, at last check. The financial sector XX:SP500.40 was down 1.6% on Monday afternoon.

Check out: The strong jobs report leads Morgan Stanley to ditch a stock-market call it made just two weeks ago

-Christine Idzelis

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10-07-24 1513ET

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