Some strategists see a buying opportunity in bank stocks despite a bumpy start to the string of big banks’ quarterly earnings reports.
Despite the decline in share prices of JPMorgan and Citigroup on Friday after they reported earnings, bank stocks could see further upside if the yield curve steepens and inflation picks up, said Mark Tepper, president of Strategic Wealth Partners.
“We think it’s a buying opportunity; we’re not concerned about the pullback at all,” Tepper said Friday on CNBC’s “Power Lunch,” pointing to the stocks’ substantial gains over the last year and particularly since the U.S. election.
The S&P 500 banks industry group is down 1.8 percent over the past week, while the S&P is up 1.3 percent. Meanwhile, the banks are up 42 percent in the past year, while the broader index is up 17 percent in that time.
“Let’s not forget that a lot of this recent runup is a product of the ‘Trump trade,’ and really none of that stuff has materialized,” Tepper said. “The Fed seems intent on raising rates; rising rates are good for the banks. Yes, the yield curve is flat, but it will steepen as inflation picks up.”
Tepper added that although recent measures of inflation have proven weak he believes inflation will eventually rise.
A steeper yield curve, which describes a condition in which the longer-term Treasury yields rise in relation to shorter-term yields, is often considered bullish for the banks as they often lend in the longer term and borrow money in the short term.
Furthermore, Tepper pointed out that the banks look well-positioned here when it comes to their balance sheets, “given the fact that they all just crushed the stress tests.”
On Friday, JPMorgan handily beat analysts’ earnings per share estimates though it lowered its net interest income forecast for the year, causing the stock to drop after initially rising. The bank is now the worst-performing Dow component this quarter.
Also Friday, Citigroup reported better-than-expected earnings despite a decline in equities trading. Wells Fargo also beat its earnings expectations on Friday though shares fell because of a decline in revenue.
Indeed, the yield curve is beginning to steepen after flattening so far this year, and that should prove beneficial for the banks, said Gina Sanchez, CEO of Chantico Global.
“We’re finally starting to see, in the last month, some steepening with the 30-year [Treasury note yield] going up more than the short end [of the yield curve]. Part of that is the markets pulling back on their expectations for Fed hikes,” Sanchez said Friday on “Power Lunch.”
“At the end of the day, it’s not just rising rates but that steepening of the yield curve. And JPMorgan has absolutely had a bang-up year in terms of profitability. We think, as the yield curve continues to steepen, that should help that in terms of increasing that interest margin,” she added.
Earnings reports for the group (and for the financial sector overall) is heavy this week. Bank of America and Goldman Sachs are scheduled to report their quarterly earnings before the market opens on Tuesday, and Morgan Stanley is set to report earnings early Wednesday.