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  1. Home
  2. / Investing
  3. / Financial Services

Stocks Under $10: Banks Are Big Winners

Citigroup, JPMorgan and Wells Fargo showed that the banking sector could still post solid earnings, even in a low interest rate environment.
By DAVID PELTIER Apr 17, 2016 | 12:00 PM EDT
Stocks quotes in this article: C, JPM, WFC, IWM, SNV, HBAN

The following commentary originally was sent to Stocks Under $10 subscribers on April 15, 2016, at 4:48 p.m. ET.

U.S. stocks moved 2% higher this week, as earnings season kicked off with Alcoa (AA) and some of the country's largest banks.

The banks were the big winners this week, as Citigroup (C), JPMorgan (JPM) and Wells Fargo (WFC) all posted solid quarterly results. Even though Citigroup was the only major financial institution to pass its "living will" test this week, the group showed that it could still post solid earnings, even in a relatively low interest rate environment.

The pace of quarterly reports picks up next week, with 97 companies in the S&P 500 index scheduled to announce results. According to S&P Capital Market Intelligence, aggregate S&P 500 earnings are expected to fall 8.4% from the previous year in the first quarter.

This marks the third straight quarterly decline and the worst performance since the second quarter of 2009. As has been the case for several quarters, energy is expected to be the largest drag on performance. Just three of 10 sectors are expected to post positive growth, led by consumer discretionary, telecom and health care.

Despite the benign profit outlook, valuations appear higher heading into earnings season. The S&P 500 is trading at its highest valuation in six years and the major U.S. stock market averages are also within 3% of all-time highs. As a result, I am comfortable having built the cash position back up to 21% of the model portfolio. I also have more than 16% invested in the benchmark iShares Russell 2000 ETF (IWM), should a buying opportunity present itself and I need more liquidity.

My own bank holdings, Synovus Financial (SNV) and Huntington Bancshares (HBAN), will kick off earnings season in the model portfolio next week. As a reminder for new readers, I provide a full preview of each company report, including a scorecard of expectations and how to participate in the conference call. Once the call is over, I circle back to readers with a recap of the results, including any recommended trading action.

Next week will be relatively quiet on the economic front, outside of some regional economic indicators and a few looks at the housing market. Ahead of the Federal Open Market Committee's (FOMC) next interest rate decision on April 27, Fed funds futures are pricing in just a 1% chance of an increase. While Fed Chair Janet Yellen and the Fed governors have said otherwise, the market is predicting just one interest rate hike in December, with a 56% probability.

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TAGS: Investing | U.S. Equity | Financial Services

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