With the first quarter 2021 earnings season kicking off this week, results from top U.S. banks may show they are back on a sustained growth path after enduring the pandemic-driven slowdown. This optimistic scenario is very much supported by one of the world’s fastest vaccination efforts, a robust recovery in the job market and the government’s spending spree which is nowhere near being over.
That's the major reason investors have snapped up bank shares this year, pushing their value to a record high.
The KBW Bank Index has jumped about 26% so far this year, while the S&P 500 gained just 9% during the same period.
JPMorgan Chase (NYSE:JPM), Goldman Sachs (NYSE:GS) and Bank of America (NYSE:BAC), our three favorite picks from this sector, have all delivered double-digit gains, despite the pandemic and thanks to their strong investment banking and trading divisions.
JPMorgan, America’s biggest bank, sees that winning spree running well into 2023. In his annual letter to shareholders last week, Chief Executive Jamie Dimon said strong consumer savings, expanded vaccine distribution and the Biden administration’s proposed $2.3 trillion infrastructure plan could lead to an economic “Goldilocks Moment”—fast, sustained growth alongside inflation and interest rates that drift slowly upward.
Record Quarterly Profit
JPM posted a record quarterly profit in the final three months of 2020, helped by its trading division and fees from mergers and acquisitions. The New York City-based global financial services company will report its Q1 earnings on Wednesday, Apr.14, before the market open. Analysts are expecting $3.06 a share profit on sales of $30.46 billion.
Trading in asset markets was one of the major factors that helped banks recover quickly from their pandemic slump. Trading revenue for Goldman Sachs reached a 10-year high in the previous quarter. The lender, which reports on the same day as JPM, is expected to post $10.1 a share profit on sales of $12.27 billion, the highest in the past five quarters.
With the economy recovering and consumer spending ramping up, what could also fuel banks’ bottom-line profitability in the months ahead are the reserve funds they've set aside to cover any soured loans. That worst-case scenario seems not to have played out during the pandemic, which means these banks are expected to free up tens of billions of dollars from their provisioning reserves for bad loans.
Adding to this optimism are slowly rising bond yields, signaling that the Federal Reserve will likely be forced to raise interest rates earlier than anticipated to ward off inflation. Higher rates allow banks to charge more to borrowers, boosting lending margins on products from credit cards to mortgages.
Bottom Line
Bank stocks, even after their powerful run in 2021, continue to look attractive with many macro trends remaining favorable for their businesses in the post-pandemic economic recovery. JPM, Goldman Sachs and Bank of America, which reports on Thursday, Apr. 15 before the open, remain our favorite financial sector picks due to their diversified portfolios and stronger balance sheets. In our view, any post-earnings weakness in these stocks should be considered a buying opportunity.