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Thursday October 15, 11:10 AM
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ANALYSIS - After JPMorgan, bank disappointments could spur selling
By Caroline Valetkevitch
NEW YORK (Reuters) - JPMorgan Chase & Co set a high standard for other banks with its results on Wednesday, and should any of its rivals' earnings fall short of expectations, shares could be headed lower.
Stocks rallied after JPMorgan reported profits much higher than expected, helping to send the Dow Jones industrial average closing above 10,000 for the first time in a year.
With Goldman Sachs Group, Citigroup Inc and Bank of America all still set to report this week and other banks, including Northern Trust, to post later this month, investors are eager to see if JPMorgan's news gets repeated across the industry.
Much is riding on the banks. The Standard & Poor's 500 index has rebounded 61 percent since the market's early March lows, and the KBW Bank Index is up 164 percent since a closing low of 18.62 on March 6.
"It does raise the bar for other banks, certainly the ones that have active trading units," said Peter Jankovskis, co-chief investment officer at OakBrook Investments LLC in Lisle, Illinois.
The sector is expected to show year-over-year earnings growth of 81 percent for the third quarter.
Shares of JPMorgan gained 3.3 percent to $47.16 to close at a 52-week high Wednesday, while other financials were strong as well.
Goldman, a trading powerhouse, has been buoyed by steadily rising expectations. The company is expected to earn $4.24 a share, according to Thomson Reuters I/B/E/S, up from 30 days ago, when expectations were for $3.58 a share. The stock rose 8.2 percent over that time. Howard Chen, bank analyst at Credit Suisse, said for brokers, "strong trading results are leading the way."
Falling short of that figure "could spell doom for the stock," wrote analysts at Bespoke Investment Group.
However, estimates for Citigroup and Bank of America have been falling, as they could be hit even harder by loan losses than JPMorgan. Still, an earnings surprise could help the shares.
Analysts said regional banks could suffer due in part to the weak commercial real estate market.
JPMorgan reported net income of 82 cents a share, compared with 9 cents in the same quarter a year ago, while net revenue on a GAAP basis was $26.6 billion versus Thomson Reuters estimates for $25 billion.
With Goldman Sachs and Citigroup set to report results Thursday, options activity was picking up on the bullish side. Volume in bullish call options was outstripping bearish put options.
Joe Kinahan, chief derivatives strategist at TD Ameritrade, said the action reflected an optimistic outlook. "Because of JPMorgan earnings there is a certainly a bullish tone to the stock and option trading in the financial stocks as well as in the financial ETF," he said.
In the second quarter, financials were helped by surprising results. Massive short bets had to be covered by bearish investors, accelerating rallies in those companies. Credit Suisse in a research note questioned whether the short-covering would reoccur to the same extent.
The financial sector is expected to have the highest earnings growth rate of any S&P sector this reporting period, according to Thomson Reuters data.
Earnings for S&P 500 companies overall, though, are expected to decline 23.7 percent from a year ago.
(Additional reporting by Chuck Mikolajczak and Doris Frankel; Editing by Kenneth Barry)
(For more news on Reuters Money visit http://www.reutersmoney.in)
