Ahead of This Week's Bank Earnings, S&P 500 Financial Stocks Are Near 'Summer Highs'

Financial stocks have outperformed the broader S&P 500 so far this month, as investors await the release of third-quarter earnings from major banks, expected to begin later this week.

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The Financial Select Sector SPDR exchange-traded fund (XLF), which holds financial stocks included in the S&P 500, was the “second-best sector ETF last week,” according to Frank Cappelleri, founder of independent research firm CappThesis. In a Monday note, Cappelleri mentioned that the fund is “once again close to reclaiming its summer highs,” with energy stocks leading the performance.

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Last week, all three major U.S. equity benchmarks — the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite — posted gains for the fourth consecutive week. This rally followed a stronger-than-expected jobs report released on Friday. Financial stocks, particularly within the S&P 500, rose by approximately 1% over the week, while energy stocks surged by 7%, driven by concerns over potential risks to oil supply due to the ongoing conflict in the Middle East.

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Looking ahead, investors are preparing for the earnings reports from JPMorgan Chase & Co. and Wells Fargo & Co., both of which are set to report third-quarter earnings on October 11. These banks are expected to kick off the reporting season for Wall Street's major financial institutions.

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Despite this anticipation, DataTrek Research shared in a Monday note that the financial sector may not deliver strong earnings momentum for the third quarter. Wall Street analysts forecast a modest 0.4% decline in overall financial sector earnings from last year. The expected 12% year-over-year drop in bank earnings has largely contributed to this pessimistic outlook. However, DataTrek highlighted that the U.S. large-cap financial sector is more than just banks, with non-bank companies comprising a significant portion of the sector’s composition.

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According to DataTrek co-founder Nicholas Colas, the upcoming earnings season will serve as a reminder that non-banking financial companies account for 76% of the sector, as represented by the Financial Select Sector SPDR ETF. These include companies in subsectors such as financial services, capital markets, insurance, and consumer finance, which are crucial to the sector's performance.

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Colas provided a breakdown of the sector’s subsector weights:

• Financial services: 32%
• Banks: 24%
• Capital markets: 23%
• Insurance: 17%
• Consumer finance: 4%

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In his view, large-cap financial stocks can be seen as a diversified play on continued U.S. economic growth. DataTrek continues to favor financial stocks as a way to invest in their “mid-cycle market theme.” Colas also emphasized that while bank earnings reports usually arrive early in earnings season, they only represent a small portion of the financial sector’s overall performance. He expects the rest of the sector to post year-over-year earnings growth, signaling strength in non-bank financial companies.

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The U.S. stock market has seen a strong performance in 2024, with the S&P 500 rising 19.4% year-to-date through Monday. The financial sector has slightly outpaced the broader index, gaining 19.8% over the same period, according to data from FactSet. While the majority of the S&P 500’s 11 sectors have been down so far this month, financial stocks have fared better than most.

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Through Monday, the S&P 500’s financial sector was down 0.5% in October, compared to a larger 1% decline for the broader S&P 500. Meanwhile, the energy sector has posted a 6.5% gain this month, as geopolitical tensions in the Middle East have fueled concerns over the global oil supply.

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On Monday, all three major U.S. stock indexes ended the day lower. The S&P 500 fell by 1%, while the Dow Jones Industrial Average dropped 0.9%, and the Nasdaq Composite declined by 1.2%. Among the S&P 500’s 11 sectors, energy was the only one to close in positive territory, finishing with a modest gain of 0.4%. In contrast, the financial sector saw a sharp drop, falling by 1.2% during Monday’s trading session.

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As investors continue to monitor economic data and corporate earnings, the financial sector remains a critical component of the overall market narrative. Although bank earnings may not excite investors in the short term, the strength of the broader financial sector, particularly in non-bank areas, could offer a more diversified opportunity for those betting on continued economic growth in the U.S.

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