As critical bank earnings keep rolling in, there's been some confusion beneath the headlines. If a bank simply beats earnings estimates, does it warrant a pop in share prices?
This is the reaction we're seeing this morning with Bank of America's (BAC) and Morgan Stanley's (MS) earnings beats. But earlier in the week J.P. Morgan (JPM), Wells Fargo (WFC), and Goldman Sachs (GS) topped expectations, yet traded lower.
All of these big banks, including U.S. Bancorp (USB), reported higher-than-expected revenue growth, while Citigroup's (C) remained flat. While this seems positive, you need to understand what's behind the numbers. As The Wall Street Journal pointed out after JPM and WFC reports, the banks topped revenue estimates mostly because they scaled down future loan loss coverage.
Nonetheless, some degree of confidence has pushed bank stocks to lead the 2012 rally. The Financial Sector SPDR (XLF) is up 18% year-to-date versus the S&P 500's 10% rise.
"The (bank) earnings justify the move that we've seen so far," says Jack Ablin, chief investment officer at Harris Private Bank. "I think we're able to hold the values that we've got. So now the question is looking forward: 'Are the favorable trends going to continue?'"Read More »from Bank Earnings: More Questions Than Answers About Sector’s Recovery