Fourth-quarter earnings season kicks off in earnest this week, and that means an avalanche of reports from the financial services sector.
With the bank earnings party getting started on Friday, investors might want to consider the Invesco S&P 500 Equal Weight Financials ETF (RYF ). The $519.3 million RYF could be an interesting earnings season idea because while bank stocks soared last year, helped by talk that the Federal Reserve is heading toward multiple interest rate hikes this year, that’s not a guarantee that all bank stocks will hit the ball out of the park this earnings season.
For example, analysts are widely forecasting that sound credit quality and improving loan growth will be themes on banks’ fourth-quarter earnings conference calls. However, higher costs and reduced fees could weigh on some the bottom lines of some financial institutions. RYF defrays some of that risk by not allocating any more than 1.66% of its weight to any of its 69 components.
Then there’s the aforementioned matter of interest rate increases, which haven’t yet arrived. Morgan Stanley analyst Betsy Graseck recently said that she expects “banks to give a bullish 2022 net interest income (NII) outlook thanks to the rising forward curve.”
However, not all banks will react the same to higher borrowing costs. Graseck says State Street (NYSE:STT) is a short end of the curve NII winner and notes that Wells Fargo (NYSE:WFC) should sees material increases to earnings per share (EPS) if either the short or the long end of the yield curve rises. Graseck adds that Northern Trust (NASDAQ:NTRS) could be a long end of the curve NII winner. Those three stocks combine for 4.65% of RYF’s roster.
JPMorgan Chase & Co. (NYSE:JPM), Citigroup (NYSE:C), Wells Fargo, and BlackRock (NYSE:BLK) are the names that report fourth-quarter results on Friday. That quartet combines for about 6% of RYF’s roster.
There are some signs that RYF could be a credible earnings play, including options market data suggesting that traders are positioning bearishly in the cap-weighted Financial Select Sector SPDR XLF.
“The one-month moving average of open put options on the Financial Select Sector SPDR Fund (XLF.P) outnumbers open calls by a factor of nearly one-to-nine,” reports Reuters. “That’s the most bearish ratio for the $48 billion financial ETF ahead of quarterly results since banks reported earnings for the first quarter of 2020, a Reuters analysis of Trade Alert data showed.”
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