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Financial ETFs Caught Between Solid Earnings & Falling Yields

Sanghamitra Saha

The financial sector, which accounts for around one-fifth of the S&P 500 index, is now busy with Q2 earnings releases. Notably, 14.3% of the financial companies under the S&P 500 index have released results, recording 6% earnings growth on 3.1% higher revenues. Beat ratios have been 78.6% and 71.4%, respectively, per the Earnings Trends issued on Jul 17. Things are pretty upbeat so far, with six major banks beating on both lines.

Let’s take a look at major banking earnings in detail:

Big Bank Earnings in Focus

JPMorgan Chase & Co.’s JPM second-quarter 2019 adjusted earnings per share of $2.59 outpaced the Zacks Consensus Estimate of $2.50. Results exclude income tax benefits of $768 million or 23 cents per share. Including this, earnings were $2.82. Net revenues were $28.8 billion, up 4% from the year-ago quarter. Also, the top line beat the Zacks Consensus Estimate of $28.4 billion.

Driven by prudent expense management, Wells Fargo WFC recorded a positive earnings surprise of 12.1% in second-quarter 2019. Earnings of $1.30 per share surpassed the Zacks Consensus Estimate of $1.16. Results were better than the prior-year quarter’s adjusted earnings of $1.08. The quarter’s total revenues came in at $21.6 billion, outpacing the Zacks Consensus Estimate of $20.8 billion. The reported figure, however, was in line with the prior-year quarter’s tally.

Citigroup C reported quarterly proforma earnings per share of $1.83, beating the Zacks Consensus Estimate of $1.78. Earnings climbed 12% year over year and revenues were up 2% to $18.8 billion. The reported revenue figure also outpaced the Zacks Consensus Estimate of $18.3 billion.

Bank of America’s BAC second-quarter 2019 earnings were 74 cents per share, handily outpacing the Zacks Consensus Estimate of 70 cents. Also, the figure was up 17% from the prior-year quarter. Net revenues amounted to $23.1 billion, which marginally beat the Zacks Consensus Estimate of $23 billion. Also, the reported figure was up 2% on a year-over-year basis.

Goldman Sachs GS delivered a positive earnings surprise of 22.8% in second-quarter 2019. The company reported earnings per share of $5.81, comfortably beating the Zacks Consensus Estimate of $4.73. However, the bottom line compares unfavorably with earnings of $5.98 recorded in the year-earlier quarter. Goldman’s net revenues were down 2% year over year to $9.5 billion in the reported quarter. The revenue figure, however, surpassed the Zacks Consensus Estimate of $8.7 billion.

Morgan Stanley’s MS second-quarter 2019 earnings of $1.23 per share outpaced the Zacks Consensus Estimate of $1.13. However, the figure shows a 2% drop from the year-ago quarter. Net revenues amounted to $10.24 billion, a decline of 3% from the prior-year quarter. However, the top line beat the Zacks Consensus Estimate of $9.98 billion.

Market Impact

Against this backdrop, investors might be wondering how financial ETFs like iShares U.S. Financial Services ETF IYG, iShares US Financials ETF IYF, Invesco KBW Bank ETF KBWB, Financial Select Sector SPDR XLF and Vanguard Financials ETF VFH have responded to the earnings releases. These funds have considerable exposure to the aforementioned stocks (see all Financial ETFs here).

Goldman and Morgan Stanley are not that prominent in the afore-mentioned ETFs but are rather heavy on iShares U.S. Broker-Dealers & Securities Exchanges ETF IAI.

Most of these ETFs put up a decent-to-subdued performance in the last five days — which marked the peak of banking earnings releases. The results were almost in line with the S&P 500-based fund SPY. The slump in long-term bond yields amid economic slowdown fears and geopolitical tensions weighed on financial ETFs despite upbeat earnings.