Focus back on US banking stocks, S&P 500 Q3 earnings

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Updated: October 12, 2021 5:07 PM

With companies reporting higher earnings and the economy coming back to normal with supply chain issues getting resolved, the banking sector may be well poised for a good run.

top, list, US banking stocks, share prices, S&P 500 Q3 earnings, KBW Bank IndexA favorable macroeconomic outlook and the prospect for higher rates and faster loan growth is keeping investors rushing on to the banking sector.

After witnessing a fair amount of volatility, the US stocks seem to have settled a bit unless there’s a bad surprise in store for the investors. The Q3 earnings season is expected to lead the momentum in the stock prices across the board. Investors are pinning their hope on a faster economic recovery that may spur the Federal Reserve to scale back its massive asset purchase program and eventually begin raising interest rates. Banking stocks are shining and are at the forefront of the recent rally in share prices.

As against the S&P 500 index which is up by about 16 per cent, the KBW Bank Index has surged almost 38% in 2021. The KBW Bank Index is designed to track the performance of 24 leading banks that are publicly-traded in the U.S. A favorable macroeconomic outlook, prospects for higher rates and faster loan growth are keeping investors rushing on to the banking sector.

Although most of the top US banking stocks may be trading at a higher valuation, keeping an eye on their price movement is what investors can do to accumulate them as and when they correct.

Top U.S. Bank Stocks

JPMorgan Chase & Co.
Bank of America Corp.
Wells Fargo & Co.
Morgan Stanley
Citigroup Inc.
Goldman Sachs Group Inc.

With companies reporting higher earnings and the economy coming back to normal with supply chain issues getting resolved, the banking sector may be well poised for a good run.

The S&P 500 is expected to report (year over-year) earnings growth of 27.6% for the third quarter. According to FactSet, based on the 5-year average improvement in earnings growth during each earnings season due to companies reporting positive earnings surprises, it is likely the index will report earnings growth of nearly 35% for the third quarter, which would be the third consecutive quarter of (year-over-year) earnings growth above 30%.

When companies in the S&P 500 report actual earnings above estimates during an earnings season, the overall earnings growth rate for the index increases because the higher actual EPS numbers replace the lower estimated EPS numbers in the calculation of the growth rate.

Of the 21 S&P 500 companies that have reported actual earnings for Q3 2021 to date, 76% have reported actual EPS above the mean EPS estimate. In aggregate, actual earnings reported by these 21 companies have exceeded estimated earnings by 4.4%. Therefore, at this very early stage of the Q3 earnings season, both the number of companies reporting positive earnings surprises and the magnitude of the positive surprises are trending closer to the 5-year average. Since September 30, the earnings growth rate for the S&P 500 has increased by 0.1 percentage points (to 27.6% from 27.5%).

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