Earnings Season is Upon Us

By Greg Guenthner Jul 14, 2014, 1:25 PM 


It’s that magical time of year that gives investors those “I wish I sold yesterday” moments. Ugly earnings reports or poor guidance can sink shares, break trends, and quickly ruin your week.

Of course, it’s next-to impossible to predict with certainty how any given company’s earnings report will look. And even if you do follow an analyst who gets the numbers right, you still don’t know how investors will react until the morning bell rings.

But you’re not completely screwed. Fortunately, trends can tell us much more than grasping at earnings guesses. And right now, they’re telling us to steer clear of the banks.

The big financial firms are set to report earnings this week. Citigroup (C) announced before the bell this morning (more on these results in just a second). JP Morgan (JPM) reports Tuesday morning. Bank of America (BAC) follows with its announcement Wednesday. Wells Fargo (WFC), often regarded as a best-of-breed bank stock, traded lower for five straight days last week (Wells released “meh” earnings Friday morning). This morning, J.P. Morgan downgraded Wells due to higher expenses and a further drop in net interest margin, according to MarketWatch.

While Wells Fargo’s chart is far from terrible, mediocre performance from the other big banks since late last year is beginning to stick out like a sore thumb…

Citigroup shares are off nearly 10% this year. JP Morgan is down almost 3%. Bank of America is off by about 1%. They all trail the S&P 500, which is now up about 6.5% since January 1st.

Yes, Citigroup shares are spiking early this morning after it announced earnings per share of $1.24, beating the$1.05 Wall Street estimate. Still Citi is the worst performer of the lot so far this year. It has a lot of catching up to do just to break even. Plus, there are plenty of reasons not to get too excited over the earnings and revenue beats, including $7 billion mortgage backed securities fine the bank will soon fork over…

And it’s not just the big banks that are lagging the averages. Here’s what I wrote on June 2nd:

“Regional banks and the mega-cap financial stocks had traded hand-in-hand until about six weeks ago. Now, an ugly divergence is emerging. Concerns over how these smaller banks will perform in an environment where rates continue to drop are taking their toll. As of this morning, the SPDR KBW Regional Banking Index is off more than 5% year-to-date.”

For the record, the SPDR KBW Regional Banking Index has bounced back slightly over the past six weeks. It’s down just 1.5% on the year as of Friday’s close.

But as I already showed you, even the big financial institutions aren’t carrying investors to gains this year. Financials are, in fact, one of the worst performing sectors in the S&P year-to-date. There’s simply no reason to bet on these stocks right now.

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