Big bank earnings are underway.
Wells Fargo, Goldman Sachs and JPMorgan all beat earnings estimates Wednesday morning. This comes ahead of reports from Citi and Bank of America before the bell Thursday.
Matt Maley, chief market strategist at Miller Tabak, is cautious on the group in the short term. He says one concern is hanging over the banks once their earnings season wraps.
“These individual stocks are going to trade on their individual earnings reports over the next few days, but once they get behind us, we’re going to go back to trading on the level of interest rates and the yield curve, which they’ve traded off of very closely for a couple years now,” Maley told CNBC’s “Trading Nation” on Wednesday.
The problem, he said, is that the rise in interest rates could hit a wall in the near term after a sharp increase so far this year.
“The thing I’m worried about is that interest rates could come down a little bit further,” said Maley. “The most recent BofA manager survey said one of the most crowded trades right now is the short Treasurys. So when the trades get crowded they usually don’t work. … Prices will go up. That means, interest rates will probably come down.”
Maley said the 1.6% level for the U.S. 10-year Treasury yield is the key. If yields break below that level, it will signal more downside to come. Higher rates and a steeper yield curve (the difference between short-dated Treasurys and long) are a boon for banking profitability – it means banks can borrow at lower cost and lend with higher interest.
Still, any downside for rates and a subsequent decline for the bank stocks could present an opportunity to investors looking for an entry point, he said.
“I think they are going to go higher over time so therefore I would want to buy the stocks on weakness,” said Maley, pinpointing $51 on the KBE bank ETF as a buy level. “That’s provided unbelievably rock-solid support in the KBE for the last six or seven months. So I think it’s going to hold that level, that’s where you want to add to the group to take advantage of when rates do tend to move back higher but I still think it has a little bit further to pull back.”
The KBE ETF closed Wednesday at $52.59.
New Street Advisors founder Delano Saporu is also watching bank ETFs to gain exposure to the group. But, if he had to choose one stock that looks best in breed, he said Goldman Sachs would be the winner.
“Looking at a competitive advantage area, you got to look at investment banking revenue as well as trading, I think Goldman obviously does a really good job of that,” Saporu said during the same interview.
Earlier Wednesday, Goldman posted profit of $18.60 a share, well above estimates of $10.22. Saporu highlighted hot activity in the SPAC and IPO market as one reason to like Goldman – the company reported a record $3.77 billion in investing banking net revenue in its recent quarter.
“If you want to look at also the trading revenue, volatility certainly plays a part in that, they also benefit from the tail winds from that,” he said.
Goldman reported $3.89 billion in fixed income trading and $3.69 billion in equities trading in its recent quarter – double-digit percentage growth for both. The company’s shares closed more than 2% higher on Wednesday.
