After a subpar 2020, the financial sector has been racing higher on optimistic Q4 earnings expectations, as well as rising interest rates.
After a busy holiday season, action in the financial markets can be quiet, mirroring the slowdown in post-Christmas retail activity. But this year, amid a global health crisis and a bumpy transition of power at the White House, the trading environment has been anything but boring.
Investors and traders may want to buckle up because things on Wall Street could get shaken up further by the onset of Q4 earnings season—scheduled to “officially” kick off this Friday, Jan. 15.
For many years, the release of Alcoa’s (AA) earnings report signified the start of earnings season each quarter, but that torch has since been passed on to the financial sector.
That’s why the 15th is of particular interest on the January calendar—it’s the day many of the country’s largest financial institutions are set to report Q4 earnings. Slated for the 15th are Citigroup (C), JPMorgan (JPM), PNC Financial (PNC) and Wells Fargo (WFC).
Bank earnings are of particular importance because many analysts have picked 2021 as a big year for this sector of the financial markets. The financials were one of the worst performers in 2020, and many are anticipating that a strong global economic rebound this year could lift the fortunes of banks and other financial institutions.
An indication of these hopes has been illustrated through performance in the financial sector since Sept. 30. Of the 11 sector ETFs, the financials have produced the second-largest returns over the last three and a half months. The Financial Select SPDR Fund (XLF) is up roughly 30% over that period.
However, some individual stocks in the sector have rallied in an even more furious fashion.
Goldman Sachs (GS), for example, has rallied nearly 60% since the start of November and is currently trading at a new all-time high (above $300/share). Shares of Charles Schwab (SCHW) have been even hotter, gaining nearly 75% since last fall—also setting a new all-time high (above $60/share) in the new year.
It’s that type of price action that typically generates a lot of attention come earnings season. High-flyers in the market are often built on rising expectations for sales, profits or subscriptions. That means market participants will be closely watching to see whether earnings projections in the financial sector for 2021 match up with recent share price gains.
In 2020, the technology sector was up against a similar eye test. After leading the stock market rebound in the summer of 2020, many investors and traders wondered whether earnings projections in the sector would back up rising valuations. So far, they have.
One recent development assisting the financial sector has been rising yields in government bonds. The yield on the 10-year U.S. Treasury Note recently hit its highest levels since last March, at 1.18%. Along those lines, the 30-year U.S. Treasury Bond likewise climbed to its highest levels since the onset of the pandemic, over 1.90%.
Generally speaking, financial institutions operate more comfortably when interest rates are rising, because they can increase their profit margins on loans. The fact that short-term interest rates effectively dropped to zero in early 2020 was a key reason the sector underperformed last year.
As always, the fortunes of the country’s largest capitalized public companies will also be under the microscope during this upcoming quarterly earnings season, including Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG), Tesla (TSLA) and Facebook (FB).
And while past performance is critical, one of the biggest boons from earnings season is the insight gained from ongoing projections. Investors and traders will therefore be scouring earnings reports this January to better understand whether the corporate sector expects a strong economic rebound in 2021.
Another underlying factor also makes this earnings season especially important.
The put-call ratio is historically used to gauge sentiment in the financial markets. It tracks how many puts are purchased on a daily basis as compared to calls. Equilibrium occurs when the put-call ratio trades at exactly 1—meaning the same number of puts and calls have been purchased.
When investors and traders are bearish, they tend to purchase more puts, which pushes the put-call ratio higher. The opposite is true during bullish periods, when more investors purchase calls, and the put-call ratio drops south of 1. Just before Christmas, the put-call ratio dropped down to 0.60—a super-bullish level only observed a few of times in the last five years
This earnings season will undoubtedly serve to reinforce that bullish optimism, or crush it.
To learn more about earnings season, and associated options trading strategies, readers can review a recent episode of Market Mindset on the tastytrade financial network. To follow all the action during earnings season, readers can also tune into TASTYTRADE LIVE, weekdays from 7 a.m. to 4 p.m. Central Time.
Sage Anderson is a pseudonym. The contributor has an extensive background in trading equity derivatives and managing volatility-based portfolios as a former prop trading firm employee. The contributor is not an employee of Luckbox, tastytrade or any affiliated companies. Readers can direct questions about any of the topics covered in this blog post, or any other trading-related subject, to firstname.lastname@example.org.