Banking Profits Could Cause Markets to Collapse

Financial Sector Earnings: What to Expect?

In recent times, investors’ attention seems to have shifted to the upcoming financial results of major banks.
While some subsectors like insurance and capital markets are showing strong growth, other areas, especially regional and diversified banks, are facing significant challenges.
The performance of global and regional bank ETFs reflects this reality, showing volatility mirroring economic and financial uncertainties.
What can we expect on the eve of the first quarterly bank reports from the stock market?

Financial Sector Earnings: A Look at the Latest FactSet Report

Financial companies expected to report their earnings over the next two weeks include giants like Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo.
According to FactSet’s forecasts, the financial sector is set to record the seventh-highest earnings growth rate (year over year) among the eleven sectors for the second quarter of 2024, with a 4.3% increase.

However, this growth rate is significantly influenced by two specific subsectors: the insurance sector, with an impressive 31% growth, and the capital markets industry, expected to see a 23% increase.
Excluding these two sectors from the overall calculation changes the situation drastically: the financial sector as a whole would experience a -6.4% decline in earnings year over year, instead of a 4.3% increase.

Which Sector Is Most Concerning for the Markets?

The major concerns revolve around the traditional banking sector.
Regional banks, for example, are expected to report a 26% drop in earnings compared to the previous year.
Even sub-industries of traditional banks are projected to record a 9% earnings decline.

Market Expectations

One of the most well-known global bank ETFs is the iShares Global Financials ETF (IXG).
This ETF tracks the S&P Global 1200 Financials index, which includes banks, investment management companies, and insurance companies from around the world.
The composition of IXG features big names like JPMorgan Chase, Bank of America, and HSBC Holdings, which represent a significant part of the portfolio.
This ETF, after the significant rally seen in recent years with rising interest rates, has recently started to contract, clearly indicating the emergence of early concerns among market participants.

The SPDR S&P Regional Banking ETF (KRE), the best-known passive fund representing the U.S.
regional banking segment, composed of shares of regional banks like PNC Financial Services Group, Regions Financial Corporation, and Fifth Third Bancorp, is also not experiencing a positive period.
After the 2023 crash following the Silicon Valley Bank’s failure, the ETF has continued to move sideways, expressing strong uncertainty among investors regarding the future of this sector in the stock market.