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A pedestrian carries an umbrella while walking along Wall Street past the New York Stock Exchange in New York.
Banks are beginning to report earnings. All four banks reporting (JP Morgan, Citigroup, Wells Fargo, and PNC) beat earnings expectations and all but Wells Fargo beat on the topline.
So why are they all trading down Friday?
There’s two issues: fundamental and seasonal.
First, the soft economic data we saw today — retail sales, but particularly the Consumer Price Index — clearly lowered the chances for a Fed rate hike later in the year. That brought down Treasury yields, which is lowering the chances for increased profits from one of the primary profit centers for banks — interest income.
Less well-known is a seasonal phenomenon: banks tend to trade up in the one month before JP Morgan reports earnings, trade slightly down on the day of the report, and is generally flat in the month after.
Here are the results for banks (represented by the SPDR KBW Bank ETF (KBE)) since 2010 in the month before JP Morgan reports earnings, the day of, and a month after:
Banks and earnings
One month before JPM: up 1.0%
Day of: down 0.1%
One month after: down 0.3%
Note that even a month after JP Morgan reports, banks tend to be down slightly (down 0.3%), while the S&P 500 is typically up 0.5%.
Bottom line: expect some downward earnings revisions on second half bank earnings around lower interest income, but factor in the seasonal weakness as well.