Forget Big Bank Earnings and Focus on what Matters to the Market
The big news coming from earnings this week is in the banking sector.
That may come as a surprise… considering we’ve been talking about a possible collapse in the sector since Silicon Valley Bank (SVB) went under on March 10 – just over a month ago.
But a quick look at the headlines suggests that everything is coming up roses.
Take a look:
- JP Morgan knocked it out of the park, and the market rewarded it with a jump of almost $10, and more than 7%, almost literally overnight.
- Wells Fargo saw a more than 6% increase within two trading days of its own announcement.
- Goldman Sachs rose by 1.7% over the day of its earnings report until the early afternoon, despite actually reporting a miss. That demonstrates the other half of this proposition: that the bigger banks are more resilient when it comes to bad news.
Given those eye-catching results, you might conclude that, after the collapse of SVB and Signature Bank , the sector is back, the stocks are rebounding strong, and it’s all gravy from here.
But the true risk is still hidden, let me tell you what it really is…
Mid-Sized Banks Are the Real Banking Bellwether
All of these results, both in earnings and the market, can be seriously misleading.
After all, these banking institutions are all the biggest of the big, the household names, the “too big to fail” banks that are such fundamental components of the economy that it’s difficult to imagine them not bouncing back by sheer size and inertia.
But more importantly, it’s difficult to imagine them not bouncing back because they’ve already had their trial by fire during the great recession back in 2008. Now, there are more guardrails and fail safes in place to protect the banks from systemic risk.
So if you really want a bellwether for how the economy may turn next, you need to look at the performance of mid-sized banks.
This is where I see things as a lot less cut and dry, with a lot more potential instability to be concerned about.
We can look at a few banks, in particular, to see this phenomenon in action.
The mid-sized banks with valuations in the tens of billions instead of the hundreds of billions.
State Street Corp., with its cap of just over $24 billion, is right around 10% of Bank of America’s market cap of $240 billion.
So how’s State Street doing?
Not good at all.
As I write this, its price has cratered more than 10% in the past 24 hours. The collapse followed a disappointing earnings miss that proves that trends are not uniform across the entire banking sector…
And it tells me that these mid-sized banks are a much better bellwether for the sector than the hundred-billion-dollar behemoths..
And there’s only one bank I’m watching closely this week…
This Bank’s Earnings Could Tell Us What Happens Next
Huntington Bancshares Inc. looks strong right now, with a 2% daily gain, but I’d be very wary in the longer term. It’s getting its earnings report later this week, and I see it as a major potential weak link in the sector. And ultimately, I see the -mid-sized banks as the real signal for the markets right now…
They aren’t “too big to fail” and they are more vulnerable to prevailing market conditions.
If they’re struggling, I see that as a much more reliable sign that we are heading back into the chop that we’ve been struggling with for the past couple of months.
However, if State Street turns out to have been a fluke, and the rest of the sector – especially banks like Huntington – show us strong earnings, we may be looking to establish new highs.
It’s impossible to say in advance. I mean, I don’t think anyone saw State Street’s disaster coming until it actually happened. It’s going to be hard to guess the results for other mid-sized banks in advance as well.
In the meantime, we need to keep a close eye on things, wait, watch, and be ready to make our moves when things become clearer.
Until next time,
April 20 2023
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