By Greg Lai and Alex Hsiao, Co-Chief Investment Officers
Much has changed over the last month in the markets, and as the earnings season starts, we may see another sign of this change. The FED signaled a change that might be viewed as the “mission accomplished” football spike. We saw a rally in the stock price from what looks like lower lows to now busting through all-time highs before the Wells Fargo earnings announcement.
Wells Fargo Bank (WFC) reported that earnings beat over 18% expectations, $1.52 vs $1.28. This report also included $0.10 of losses recognized on the repositioning of debt securities in their portfolio, so the beat was even higher. Revenue was down from a year ago, with net interest income also down, but noninterest income was up. Despite the recent move, WFC trades at a Forward P/E of 11x. A growing economy and reasonable interest rates could bode well for the markets, as financials have been the laggard during the current market rally. For Wells, lower rates have been good for mortgage loan originations, and strength in the stock market has led to a 5% yoy increase in wealth and investment management fees. Many other parts of banking, like commercial and consumer, were flat from the previous quarter, which leaves some upside in the recovery and lower rate environment.
Other banks like JPM and financial service firms like Blackrock also showed earnings surprises, which bodes well for the economy and could be a predictor of earnings to follow. Financials weren’t expected to be a big drive of earnings this quarter.
In the coming week, we’ll see some other bellwether reports next week, such as Goldman Sachs, Morgan Stanley, and Discover Financial. We still think value matters, and currently, the S&P 500 Financial sector trades at the second-lowest Forward P/E (FPE) among all sectors at around 16x. Only one sector is cheaper at 14x, and that is Energy. Overall, the S&P 500 trades at an FPE of 21x, with Technology at 29x FPE. It might be a good time to trade-in that Tesla for a Stagecoach, a company founded in 1852!
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