2nd Quarter Earnings

The earnings season for the Second Quarter has begun with nearly 100 of the 500 companies in the S&P 500 Index reporting and so far, over 80% of them have beat their estimates.  The largest percentage of companies who have reported Q2 earnings is in the Financial sector, as approximately half of the companies within this sector have reported this month.  All but three companies beat earnings estimates as higher interest rates improved their overall profitability. However, several large banks like Goldman Sachs, JP Morgan and Bank of America sold off earlier this week after beating estimates as they experienced declining revenue from fixed income and commodities trading, which fell during the past quarter due to historically low levels of volatility.  Some of the selloff may have been due to profit taking, as bank stocks have been one of the better performing areas since the election and experienced a sharp increase at the end of the June in anticipation of better-than-expected earnings.  Morgan Stanley was the lone exception this week, as it saw broad gains across its businesses which helped the stock rally post earnings announcement.  However, the sector rallied into the end of the week as more companies reported positive earnings that beat Wall Street estimates.

Ten of the largest banks in the nation collectively made $30 billion in profits last quarter, which is just shy of the record set in 2007 before the financial crisis.  This occurred despite a persistently low interest rate environment, declining revenue from trading operations and strict government regulations.  We expect profitability to continue to improve as economic growth here and abroad drive interest rates higher and the current administration focuses on rolling back regulations on financial institutions.  Therefore, we have maintained our overweight to the sector across our model portfolios.