Banking stocks are about to face a new big hurdle

U.S. bank stocks are at a crossroads — trying to regain the momentum they had earlier in the year amid signs that the Trump-trade cornerstones that had spurred the rally are not turning out as planned.

Investors will learn more about where the nation's major financial institutions stand later in the week, when the sector kicks off second-quarter earnings season. Financials broadly are expected to show profit growth of 6 percent, third-best of the 11 S&P 500 sectors.

JPMorgan, Citigroup and Wells Fargo report Friday.

As banks have gotten a boost lately from positive stress-test results and plan in some cases to return record levels of cash to investors, the catalysts for more growth nonetheless appear less certain.

To be sure, things have turned up lately for banks. Rising Treasury yields have been a benefit, as has the all-clear the Federal Reserve gave banks for their plans to return capital to shareholders through buybacks and dividends.
The sector stocks, as measured by the SPDR S&P Bank ETF, has jumped about 7.5 percent since the beginning of June, most recently getting a post-stress-test push. However, banks face a number of headwinds, most of them coming from Washington.

Goldman Sachs analysts say "policy uncertainty" continues to haunt banks, which along with energy, materials and industrials was supposed to fare best under the Trump administration's economic agenda. Goldman said the issue has particularly hurt commercial and industrial lending and M&A activity. Announced deals in the U.S. fell nearly 16 percent in the first half of the year, according to Thomson Reuters.

Earnings estimates in general have been coming down for the banks, though the profit outlook for the financial sector remains solid. However, that 6 percent projected earnings gain comes down to 2.8 percent when excluding the gaudy 20 percent projected for insurers.  Early results from S&P 500 companies, however, look strong.

Source: Bloomberg

Trader I. Ivanov

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