US bank rally sharpens pressure on earnings

America’s largest banks are under pressure to shine as the quarterly earnings season begins this week, with investors questioning the sector’s rally since President Donald Trump’s election.

While the S&P 500 Banks Index has retreated in recent weeks, it is still up 23 per cent since early November and analysts are forecasting overall profits for the sector to be 12 per cent higher in the first quarter than a year ago, according to FactSet.

“There has been much optimism baked into the market regarding the potential benefits from the Trump administration’s policies regarding tax reform, deregulation and capital spending,” said Lindsey Bell, an investment strategist at CFRA Research.

JPMorgan Chase, Citigroup and Wells Fargo kick off first-quarter earnings for the sector on Thursday, and results from Bank of America, Goldman Sachs and Morgan Stanley follow the week after.

Bank shares have been one of the big beneficiaries of hopes that Mr Trump’s promise to cut corporate taxes and ease regulation will help lenders’ bottom lines. The more than 30 per cent advance in shares of BofA since the election, for example, underline how expectations for profits have moved higher.

Considered more sensitive to fluctuations in the US economy because of its large domestic business, BofA’s shares have soared by a third. However, that has left the bank valued at 12.45 times expected earnings over the next 12 months, up from 10.93 times in November, FactSet data show.

The loftier valuation for US banks, alongside recent signals from the Federal Reserve that it is unlikely to surprise investors with a faster pace of interest rate rises, has already drawn some of the thunder from the rally. The S&P 500 Banks Index has fallen more than 8 per cent since reaching its most recent high in early March.

Despite Wall Street still waiting for Mr Trump and the Republican-controlled Congress to deliver a package of economic stimulus, some analysts believe the outlook for the shares of big US banks remains a robust one.

“Fundamentals look just fine,” said Susan Roth Katzke, analyst at Credit Suisse.

Thanks to a stable economic backdrop and higher short-term interest rates, there is a “strong environment for the large-cap US banks to finally begin to improve profitability again,” according to Marty Mosby, an analyst at Vining Sparks.

Additional reporting by Ben McLannahan.