The Financials Don’t Care About Your Rate Cut

By Spencer Israel

You’d be forgiven for not realizing it, but the financials are hot.

The market seems to believe that the Fed will cut rates at the end of July. Central banks around the world are hinting at more quantitative easing. The yield curve has flattened to the point of inversion. One of Europe’s largest banks is collapsing on itself.

And yet, despite all that, the banks are out in front helping lead this market to new all-time highs. Only technology has outperformed the financials over the past four weeks, and by the slimmest of margins. There are a few reasons why.

1) Consumer Strength

Let’s start with earnings. Predictably, the four major U.S. banks—JP Morgan, Bank of America, Wells Fargo, and Citigroup—all exceeded the Street’s expectations for their Q2 earnings, though that has less to do with outperformance and more to do with muted expectations.

The biggest theme we can take away from these reports is that the consumer is strong. Loans and deposits were up across the board, signaling that the consumer lending segment of the business is strong. JP Morgan, Citigroup, and Wells Fargo also all saw an increase in credit card spending and mortgage originations, as consumers take advantage of being near full employment.

2) Buybacks

The biggest headline coming out of the banks might not have been their earnings, but their stress test results. All 18 banks passed the Fed’s annual stress test, though Credit Suisse was only granted conditional approval of its capital planning and JP Morgan and Capital One only passed after re-submitting their capital plans.

In any case, the banks once again used this opportunity to increase their buybacks (sound familiar?) and dividends:

  • JP Morgan raised its quarterly dividend from $0.80 to $0.90 per share and announced a $29.4 billion buyback
  • Wells Fargo raised its quarterly dividend from $0.45 to $0.51 per share and announced a $23.1 billion buyback
  • Citigroup also raised its quarterly dividend from $0.45 to $0.51 per share an announced a $17.1 billion buyback
  • Bank of America raised its quarterly dividend from $0.15 to $0.18 per share and announced a $30.9 billion buyback

Even Goldman Sachs and Morgan Stanley, both of whom saw earnings decline year-over-year due largely to declining trading revenue, increased buybacks and dividends after the announcement. Morgan raised its buyback from $4.7 billion to $6 billion and quarterly dividend from $0.30 to $0.35 per share, and Goldman added a $7.8 billion buyback and raised its quarterly dividend from $0.85 to $1.25 per share.

3) Valuations Are Appealing

As State Street Chief Investment Strategist Michael Arone recently told Reuters, bank stocks are relatively unloved right now, and that makes them appealing.

All six stocks mentioned above have P/E multiples lower than the S&P 500. And if you believe that the yield curve could steepen and that a rate cut wouldn’t have as much of an impact as was previously believed—as the executives have said on their earnings calls—all of a sudden you’ve got two potentially upside catalysts.

Over the last month, all the major banks stocks have outperformed the S&P 500, as has every nearly every bank and financial services ETF.

The author has no positions in any of the securities mentioned

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