In the midst of uncertainty among the blue chip tech stocks and other typical market leaders, the financial sector has emerged as one of the more consistent and economically promising areas of the market in 2021. The segment kicked off the year with solid fourth-quarter earnings results and, with America’s economic engines stirring back to life, the market is looking to the nation’s banks to supply the liquidity for the nation’s economic comeback.
With first-quarter earnings on the horizon, trading research platform VantagePoint aims to take a look at which sectors and companies are poised to capitalize on 2021’s first earnings season, including the nation’s banks. An upcoming free demo of VantagePoint’s A.I.-enabled software will illustrate how traders could see their trading accuracy improve by as much as 87.4% using institutional-quality research and charting tools.
Prior to the demonstration, let’s take a look at how the domestic banks and financial institutions have fared so far in 2021 and what factors might influence their future performance.
The earnings story, at least among the large banks since they reported back in January, is that financial activity through the end of 2020 was strong, particularly among the investment and loan portfolios of major banks like Goldman Sachs Group, Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS).
The larger picture behind this growth is that, despite the ongoing pandemic, the U.S. has a lot of capital kicking around its economy thanks to several rounds of government stimulus and unexpectedly resilient economic activity among its businesses. One standout quality among last season’s bank earnings was the fact that a sizable amount of this available capital made its way to the stock market through many of these banks’ brokerage services.
A recent statement from JPMorgan Chase & Co. (NYSE: JPM) CEO Jamie Dimon singled out his spending as a key driver of the economic growth the nation has so far seen in 2021, predicting additional spending on small business stimulus and infrastructure could continue driving growth well into 2023.
However, with that government spending and the potential for economic growth on a scale the U.S. hasn’t seen in decades also comes the risk of inflation.
Inflation, of course, is a mixed bag for the market, potentially hampering business growth and thereby hampering stock growth.
However, one sector of the economy that typically benefits from rising inflation and, potentially, rising interest rates is the financial sector, since rising rates mean high yields on loan and fixed income portfolios, which increases revenue margins for the financial institutions with those portfolios.
This could be particularly rewarding for regional and community banks like Fifth Third Bancorp (NASDAQ: FITB), Merchants Bancorp (NYSE: MBIN) Citizens Financial Group, Inc. (NYSE: CFG), which had a similar start to the year as their larger counterparts thanks to an increase in lending activity. Should inflation and interest rates rise through the rest of the year, these smaller regional banks stand to benefit from more profitable business and home loans in a rising rate environment, even more so than the national banks.
Hopefully, the early signs of economic activity the U.S has seen will continue through the remaining months of 2021. Regardless, the first three months of the year have already set the stage for an interesting market environment come Q1 earnings, with the first bank stocks scheduled to report in mid-April starting with JPM and GS on April 14.
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