2023 is going to be GREAT (here’s why)

Mitch takes a look at the positives and negatives of the banking sector this quarter—earnings are improving, but unrealized losses could become an issue for some banks.

What We’re Seeing This Earnings Season for U.S. Banks Second quarter earnings for the Financials sector are fully underway, which in my view acts as an important barometer for the underlying health of the U.S. economy. If U.S. consumers are the main engine of the U.S. economy, banks might be viewed as the pedals—speeding up or slowing down overall activity via loan volumes, credit availability, and liquidity.1 A balanced look at the Financials sector and bank earnings landscape means weighing both the positives and negatives. Here’s what I’m seeing in the current environment.2 The Positives Let’s start with earnings, which arguably hold the highest importance. Overall, the Zacks’ view is that the earnings outlook for major banks has been improving, with stabilizing underlying business trends. We see this in earnings revision trends, where estimates for Q2 have been ticking higher across deposits, trading volumes, and investment banking fees. Early signs show a ‘better-than-expected’ theme emerging. The expectation is for Finance sector earnings to be up +8.3% from the same period last year on +5.6% higher revenues, which would follow the sector’s +11.9% higher earnings on +7.3% revenue gain in the preceding period (2024 Q1). As seen in the chart below, total loan volumes have stabilized following a decline in year-over-year growth over the past year (and following 2023’s regional bank stress). Even still, banks are bringing in more profits from lending than they were two years ago, though profit growth appears to be leveling off as the economy adjusts to higher rates. This Earnings Season and Your Investment Portfolio For deeper insights into the current earnings season, Zacks analysis of recent economic and market activity, and detailed forecasts, I’m delighted to present our latest July Stock Market Outlook Report 3. The report also covers key U.S. economic data, highlighting modest GDP growth, rising incomes and spending, cooling inflation, and a mixed labor market. You’ll also find: Capital markets commentary: Is the S&P 500 too concentrated? Key U.S. economic data Global market data Zacks S&P 500 earnings insights Zacks sector picks And more… If you have $500,000 or more to invest, request our free July Stock Market Outlook Report 3 today! Loan Growth Has Stabilized at Modest Levels Source: Federal Reserve Bank of St. Louis 4 Another positive has been in the investment banking segment. Fees are on track to be nicely positive year-over-year in Q2 2024, as companies have been raising money in debt markets and dealmaking is on the rise. Q1 was a standout quarter for investment banking divisions, and Q2 could build on that momentum. Over the past 12 months, Financials has been the best performing sector behind Technology and Communications Services, and some of the key money center banks have been outperforming the S&P 500 year-to-date. In Zacks’ view, the group’s positive stock market performance reflects the strong fundamentals we’re seeing today, but there is also likely some optimism about lower rates baked into prices. The resulting easing of financial conditions could spur more dealmaking and serve as a catalyst for credit demand. The Negatives Last year, market-watchers became acutely aware of unrealized losses on bank balance sheets, given the regional bank stress and failures of Silicon Valley Bank, Signature Bank New York, and First Republic, among others. With rates still at relatively elevated levels, these unrealized losses are still at high levels. According to the Federal Deposit Insurance Corp., banks have little over half a trillion dollars of unrealized losses on their balance sheets, which the FDIC labels as “unusually high.” Unrealized losses are not necessarily a glaring problem—unless a bank finds itself needing to raise a significant amount of capital suddenly. Large banks appear to be in solid enough shape to avoid this issue, with very high tier 1 capital ratios and plenty of liquidity on hand. Midsize banks continue to be a different story. They tend to hold a higher proportion of commercial real estate debt, which is an area where delinquencies have been rising. This particular segment will be one to watch closely in the coming quarters. Another issue is in consumer loans and credit cards, which are seeing higher delinquency rates. As seen in the chart below, delinquencies in consumer loans (red line) are rising at a faster pace than overall loans, which could serve as a headwind to bank earnings going forward if the problem worsens. Source: Federal Reserve Bank of St. Louis 4 A final headwind to point out is the impact that higher rates are having on deposit costs for banks. Banks are increasingly rotating customer deposits out of non-interest-bearing accounts into interest-bearing products like CDs, which suggests that net interest margins could tighten as the year progresses. Bottom Line for Investors The environment for banks is expected to change in the next year, with the rising probability that the Federal Reserve could lower rates. If rates do indeed come down from current levels, it could increase the value of banks’ securities portfolios, which strengthens capital positions and could lead to more loan activity and deal making. It could also ease pressure on banks’ profitability by lowering rates paid out on high-yield savings accounts and CDs. This is all hypothetical at this moment; however, I’m not expecting the Federal Reserve to be overly aggressing in easing financial conditions over the next twelve months. Banks seem more likely to maintain their strong overall financial position and deliver modestly positive earnings growth in the second half of the year, given the outlook that interest rates do not seem likely to move much. I recommend making your investment decisions based on solid data. To help you do this, I am offering our comprehensive July Stock Market Outlook Report 5. This report is packed with detailed forecasts and expert insights, including: Capital markets commentary: is the S&P 500 too concentrated? Key U.S. economic data Global market data Zacks S&P 500 earnings insights Zacks sector picks And more… If you have $500,000 or more to invest, request our free Stock Market Outlook Special Report today! About Zacks Investment Management Zacks Investment Management was born out of one of the country’s largest providers of independent research, Zacks Investment Research. Our independent research capabilities from our parent company truly distinguish us from other wealth management firms - our strategies are derived from research and innovation, including the proprietary Zacks Rank stock selection model, earnings surprise and estimate revision factors. At Zacks Investment Management, we work with clients with $500,000 or more to invest, and we use this independent research, 35+ years of investment management experience, and tools we’ve developed to design customized investment portfolios based on each client’s individual needs. The end result is investment management that is research driven, results oriented and client focused. Talk to a Zacks Wealth Advisor today. © Zacks Investment Management  |  Privacy Policy 1 Wall Street Journal. July 13, 2024. 2 Zacks.com. 2024. 3 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion. 4 Fred Economic Data. May 21, 2024. 5 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion. DISCLOSURE Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. 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