More profitability means a better outlook for the financial sector

Market Realist

Why the banking sector is better, but with room for improvement (Part 2 of 5)

(Continued from Part 1)

This good news is a big reason why my team and I are less bearish on the global financials sector than we have been in the past. In fact, in our latest Investment Directions monthly market outlook, we upgraded the sector to neutral from underweight mainly because of our improved outlook on US financials, which dominate the global financials index, and our expectation that rates will moderately rise over the next year.

Market Realist – The graph above shows you how the financial sector (XLF) has shown increased levels of return on equity after the sharp fall it witnessed during the financial crisis of 2008.

Most of the top banks beat Bloomberg analyst estimates for earnings for the second quarter of 2014. Here are the highlights:

    • Goldman Sachs (GS) reported adjusted earnings per share (or EPS) of $4.10. Meanwhile, Bloomberg analysts had been expecting EPS to be $3.09. The revenue for the quarter of $9.1 billion was more than analyst estimates of $8.0 billion.
    • Citi Group (C) announced adjusted earnings per share of $1.24, which outperformed the Bloomberg analyst consensus estimate of $1.08.
    • Bank of America (BAC) also delivered a positive earnings surprise as it announced adjusted EPS of $0.41. This was greater than both analyst estimates of $0.29 and EPS of $0.32 in the previous year’s corresponding quarter.
    • JP Morgan (JPM) announced earnings of $1.59 per share, beating analyst earnings estimates of $1.30.

Read on to the next part of this series to see why the picture isn’t as rosy as it seems.

Continue to Part 3

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