How Important Are Big Bank Earnings?

Despite mostly positive earnings reports out of six of the largest American banks, financial stocks have slumped since big banks earnings season started last Friday. Bank of America Corp BAC, Citigroup Inc C, Morgan Stanley MS, Goldman Sachs Group Inc GS and JPMorgan Chase & Co. JPM all reported Q4 earnings beats, while Wells Fargo & Co WFC came up 4 cents short of consensus EPS estimates.

Unfortunately, the solid numbers haven’t translated to positive share price momentum for investors. Since last Friday, the Financial Select Sector SPDR Fund XLF is down 2.0 percent, and all six banks stocks mentioned above are down between 2.6 and 4.0 percent.

Delving Into The Selloff

While the selloff is likely disappointing for shareholders, it shouldn’t be particularly surprising. Bank stocks have been red-hot in recent months. Each of the six U.S. mega-banks is up between 18 and 40 percent since mid-October.

In addition, earnings historically don’t have too much correlation with bank share prices. Looking back at the previous five quarters, the six companies mentioned above beat consensus Street EPS numbers in 25 out of 30 collective quarters. In the week following those 25 earnings beats, the banks generated an average return of +0.97 percent. In the week following the five earnings misses, the banks generated an average return of +0.92.

Surprisingly, the better bank earnings are, the worse share prices have performed in recent history. In two out of the last five quarters, all six of the big bank stocks beat earnings estimates. In those two quarters, bank stocks generated an average one-week return of -1.39 percent.