U.S. Bank Stock Gains May Stall After Two-Year Rally
After two years of sharp gains for U.S. bank stocks, investors betting on another big boost for 2018 may be disappointed unless loan growth accelerates or regulations slacken considerably.
The S&P 500 bank sector index .SPXBK beat first quarter earnings estimates by 3.1 percent, and Wall Street’s 2018 earnings growth consensus for the sector climbed to 32.2 percent in early May from 28.4 percent on April 1, according to Thomson Reuters data.
But strength in trading revenue, net interest margins and lower tax rates from legislation passed by the U.S. Congress in December, was not enough to offset investor disappointment over the growth rate in bank lending.
Despite better-than-expected profits, the S&P 500 bank index traded sideways in the first few weeks of earnings season, which was kicked off by JPMorgan Chase on April 13. As the broader market gained in early May, the sector enjoyed a five-day rally to show a year-to-date gain of 1.2 percent, a far cry from the annual gains of 20 percent in both 2016 and 2017.
The S&P 1500 bank index .SPCOMBKS of small and mid-sized banks has done slightly better than the bigger banks with a 2 percent year-to-date increase. But it too pales beside 22 percent and 17 percent gains for 2016 and 2017, respectively.
Investors view the bank sector as a way to profit from rising interest rates and economic growth. Some are betting on more gains in the sector, hoping for improving loan demand, more profit growth from rising U.S. interest rates and regulatory relief, such as looser lending, trading and capital restrictions.
But others are skeptical banks have much more room to rise.
“It’s hard to expect there’s going to be some sort of home run for the banks,” said Frederick Cannon, director of research at Keefe Bruyette & Woods.
“Higher rates are (priced) in the stocks. The tax bill is in the stocks. The lighter regulatory touch, maybe we’ve already seen the benefits of that,” Cannon said.
A potential catalyst is accelerating loan growth, but that’s not very likely, he added.