Financial Sector Estimate Revisions Still Show Favorable Trends

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Includes: IPF, IXG
by: Brian Gilmartin, CFA

Since probably late November '16, there has been a plethora of pundits appearing in the mainstream financial media telling investors to wait for a pullback before buying the Financial sector. However, like the "treading of water" the S&P 500 did from mid-December to mid-January, the Financial sector hasn't pulled back much on down days or down weeks, and in fact, a number of Financials have gone on to all-time highs in 2017, such as Berkshire Hathaway (BRK.A, BRK.B), Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM), just to name a few. (Long all three names, with the two of the larger Financial weights behind Schwab being Goldman and JPMorgan.)

Should readers be cautious ? Is there a pullback in the offing ?

There could be. At any time and for any number of reasons, any sector can correct 5-10% just in the normal course of a market evolving.

Here are the numbers for the Financial sector:

  • Q4 '17: +18.7%, vs. +13.5% as of January 1, '17
  • Q3 '17: +7.9%, vs. +7.3%, as of January 1, '17
  • Q2 '17: +10.6%, vs. +10.1% as of January 1, '17
  • Q1 '17: +15.5%, vs. +16.0% as of January 1, '17
  • Q4 '16: +11.6% vs. +15.4% as of January 1, '17

(Source: Thomson Reuters I/B/E/S TWIE dated 2/24/17)

Financial sector revenue growth in Q4 '16 is currently 3.9%, which is slightly better than the average revenue growth since the mid-2000s.

The key tell for readers is that forward quarters continue to see higher revisions during a period where the course of normal revisions is negative. For example, note Q1 '17, for which earnings start to get reported beginning April 10, 2017.

While the expected Financial sector earnings growth of +15.5% is slightly lower than January 1's expected rate of +16%, the S&P 500 (NYSEARCA:SPY) (total benchmark) has dropped to +10.5% as of this weekend for Q1 '17, versus a 13.8%+ growth rate expected on January 1, '17.

The point being that relatively (which is what you want from a sector rotation strategy), the Financial sector's expected earnings growth is hanging in much better than the S&P 500 overall. And the same goes for the rest of the forward quarter's after Q1 '17 as well.

As of this weekend and today, the forward estimates for Financials continue to look good.

Thanks for reading.

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