Ruzbeh Bacha
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Ruzbeh Bacha in City Falcon,

Bank earnings upbeat but stocks drop. Is there a buying opportunity for investors?

Bank earnings topped estimates, yet prices of bank stocks JPM, C, WFC dropped.

What drove their earnings?

Buoyant markets helped drive investment banking revenues for these banks, but lack of volatility impacted their trading revenues that proved to be a drag on their overall performance

What spoiled the party? 

Multiple factors dampened sentiment:

1) Soft bank guidance, particularly from JPM: The bank trimmed forecasts for loan growth and net interest income, citing slower pace of economic growth and delay in reforms   

2) Dismal US economic data: Retail sales and CPI data released on Friday missed estimates, highlighting subdued economic growth.   

3) Fed's dovishness: Fed chair Yellen took a dovish stance during her testimony last week and indicated gradual pace of rate hikes, which could impact bank revenues

Further, investors questioned whether EPS growth in banks was being driven by share buybacks or reflected real earnings growth. Fading hopes of Trump reforms made them doubtful of the sustainability of bank earnings.The drop in these stocks post earnings happened as investors who had flocked to financial stocks prior to earnings took a breather to consider the future outlook for bank profitability given these red flags.

It's not so gloomy yet

Despite the initial negative reaction from investors, the sector looks promising.The recent clearance of stress tests by all the banks highlights the good health of the industry. A pick up in inflation and steepening of the yield curve could act as catalysts to drive earnings going forward. Investors could do their research and use this dip as a buying opportunity.