Preview of US Banking Earnings Reports: Is the Era of Trump 2.0 Ushering in a Return to Glory for US Banks?

The US stock earnings season is about to kick off, and this week, bank stocks such as JPMorgan Chase, Citigroup, Goldman Sachs, and Wells Fargo will be the first to release their earnings reports.

 

Today, let's briefly discuss US bank stocks, which are not often mentioned.

 

 

 

Looking back at history, during the Trump 1.0 era, in order to boost the economy, the US government relaxed financial regulations on banks with assets of less than $250 billion.

 

At that time, more than 5,000 small and medium-sized banks, except for a dozen leading banks, did not need to conduct risk stress tests as required by regulatory authorities. This was also a foreshadowing of the Credit Suisse bank crisis in previous years, but we won't elaborate on this here.

 

However, as long as there is an expectation of regulatory relaxation, it is definitely more beneficial than harmful to the US banking industry.

 

For example, since Trump's election, Goldman Sachs' stock price has been soaring, with a cumulative increase of over 50% in the past 12 months.

 

Goldman Sachs is not the only investment bank with a soaring stock price.

 

The KBW Bank Index, which tracks the overall performance of US bank stocks, rose by more than 36% in 2024.

 

Buying bank stocks has now become a consensus among strategists at major Wall Street banks.

 

Mike Mayo, an analyst at Wells Fargo, said, "History is unlikely to repeat itself exactly, but it may 'rhyme'."

 

According to his analysis, in the three historical interest-rate-cut cycles (1995, 1998, and 2019) where the Federal Reserve cut interest rates without causing an economic recession, bank stocks initially experienced a sell-off after the first rate cut, but rebounded in the following weeks and outperformed the S&P 500 index.

 

Analysts at Barclays Bank believe that "election results will translate into bank earnings, and the market is pricing in this optimism, betting on a further recovery of bank stocks."

 

 

Let's first review the performance of these bank stocks when they released their earnings reports last time.

 

Take Wells Fargo and JPMorgan Chase as examples. Their third-quarter results exceeded expectations, and their stock prices rose significantly on the same day.

 

This is also the current basic situation of the US banking industry-low valuation and high performance.

 

Since the Federal Reserve started rapidly raising interest rates in 2022 to curb inflation, by July 2023, the interest rate had been raised to the highest level in nearly ten years, ranging from 5.25% to 5.5%.

 

It remained at this high-interest-rate level until September 2024 before the rate hike.

 

The prospect of long-term high interest rates in the US has made the market uneasy, and there are growing concerns about the health of the US economy.

 

It was not until September 2024 that the Federal Reserve lowered the benchmark interest rate by 50 basis points for the first time. Many people believe that the Federal Reserve was forced to cut interest rates because the US economy could not withstand a recession.

 

However, the current earnings reports of US banks have refuted this exaggerated view with facts, showing the latest signs that the Federal Reserve may be able to combat inflation without pushing the economy into recession, the so-called soft landing, or it can be said that there is no so-called "landing" for the US economy at all, and it will continue to grow strongly.

 

 

I think the US banking industry is a good investment track. I also mentioned this in my 2025 outlook and recommended Citibank.

Citibank is currently the only large-cap bank stock in the US stock market with a price-to-book ratio (P/B ratio) below 1.

 

Currently, about 80% of Citibank's revenue comes from three top-tier businesses: global service business, including the number-one corporate international payment business; top-five investment banking; and top-three credit card company.

 

Considering Citigroup's business scale and compared with its peers, with the current P/B ratio, I think it is in a highly undervalued position.

 

It increased by nearly 40% in 2024, and in my personal observation, the stock is expected to double in the next three years, making it a good choice for long-term regular investment.$C $JPM $WFC