JPM to set the tone for XLF

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AMERICAN BANKS DISCUSSION POINTS:

  • Major U.S. financial institutions to officially kick off third quarter earnings season this week, with JPMorgan due to release results on Wednesday
  • Big bank profits set to decline after spectacular second quarter deals, but earnings outlook should remain constructive in response to the rising rate environment
  • Positive directions from C-suite may be a bullish catalyst for financials, boosting XLF in the medium term

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Investors will have the opportunity to assess the health of the equity market and its outlook when the earnings season ramping up seriously this week. The big banks are going officially start the third trimester reporting period with JP Morgan unveiling results the Wednesday before the opening bell, followed by Bank of America, Citigroup, Wells Fargo and Morgan Stanley on Thursday, and Goldman Sachs on Friday.

The table below summarizes the key earnings announcement dates and BPA expectations for some of the biggest U.S. banks this week:

Source: Yahoo Finance

After a spectacular performance in the second quarter, large-cap bank profits are expected to moderate, but should to stay healthy and robust vs historical standards, up 20% year-on-year, supported by consumer fees, wealth management fees and strong gains in investment banking divisions thanks to record M&A activity. JPMorgan, Goldman Sachs and Morgan Stanley, three dominant forces in this arena, are well placed to benefite trend and may see their subscription and advisory fees increase by more than 20% year-on-year, a result that can increase their results, offsetting low fixed income and equity trading volumes.

Focusing on thequarterly newsletters, traders should scrutinize how the macroeconomic context has influenced bank fundamentals in recent months and closely monitor the directions of companies to estimate future earnings and adjust their expectations accordingly. Although pessimism has percolated by the market on signs of economic slowdown, banks are expected to remain optimistic on loan activity in the middle faster to lend demand growth and improving margins as bond yields start to recover and the Treasury curve steepens.

An important thing to watch out for should be the net interest outlook Income, which represents more than half of the banking sector returned. While lenders are confident that this measure will increase sustainably over the next few months as the Fed begins to tighten monetary policy and the economic transitions to higher rates, the actions of mega-banks could continue to well over the next few months. This would have leave the XLF Financial ETF in a good place to command the force and reach new records before the end of the year.

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XLF TECHNICAL ANALYSIS

XLF has been trading within an ascending channel since April and is now approaching the upper limit of the bullish pattern near 39.25, a key resistance. If drunkYes succeed in pushing the price above this technical barrier, the ETF would be in uncharted territory, but it could potentially meet resistance around 41.20, a bullish target achieved by projecting half the height of the channel from the breakout point.

On the other hand, if the sellers regain control of the market and XLF correct below, the first support to be considered appears in the 37.50 area. If the price drops below this level, we could see a pullback towards September low at 36.00

XLF TECHNICAL TABLE

XLF price table

Source: TradingView

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— Written by Diego Colman, contributor

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