Investors Hope Bank Earnings Will Prove Recovery Is Real

As big banks start reporting their first-quarter earnings this week, investors will be looking to see if the recent spate of good news suggests a turnaround is for real.

Goldman Sachs kicked off the earnings season Tuesday with earnings that shattered expectations yet disappointed investors after the company said it was selling $5 billion in common stock. The capital-raise will help Goldman repay government bailout money but will be dilutive to existing shareholders, sending the stock price lower in after-hours trading.

JPMorgan Chase follows on Thursday, while Friday features Citigroup and CNBC.com-parent General Electric , whose finance arm has been responsible for much of the company's profit woes.

While the news on financials lately has been mostly positive, there's some concern over whether the rally can last.

"What we're seeing right now is a time period where expectations are still pretty negatively biased," says Chris Armbruster, senior research analyst at Al Frank Asset Management in Laguna Beach, Calif. "I think a lot of people are skeptical of the rally, but if you're looking out a couple of years, right now we're sowing the seeds for a very healthy recovery."

Slideshows on CNBC.com

• Companies at Greatest Risk of Default
• World's Safest Banks
• Wackiest Tax Deductions

Goldman had been expected to post earnings of $1.64 a share, but instead put up a profit of $1.7 billion, or $3.39 a share. Analysts surveyed by Briefing.com expect JPMorgan to post a 32-cent profit, while Citi probably will lose 37 cents and GE will see a 21-cent profit.

There's some optimism, though, that the results could be a bit better than the dampened expectations.

Wells Fargo Shines Light

Last week's notice from Wells Fargo that the bank's earnings were running well ahead of projections was the latest in a series of indications that the nation's biggest banks had begun to creep out of the shadows of the credit crisis.

Yet few were ready to sound the all-clear siren, with the echoes of the credit crisis still reverberating through the air.

"It's better than a sharp stick in the eye," Uri Landesman, head of global growth strategies at ING Investment Management in New York, says of the turn in the news cycle for financials. "I'm not sure I would declare victory off those numbers, but it's definitely better than saying" things are worse.

Still, with the earnings reports looming and the uncertainty of results from government stress tests, the news from Wells couldn't have come at a better time.

The bank said it was set to report a $3 billion profit for the first quarter, a stark contrast to expectations that most financials still face significant losses in the form of toxic loan assets that still need to get cleared from their balance sheets.

Buying Again, Slowly

Portfolio managers say they've been wading back into financials.

The SDPR Financial Select exchange-trade fund, which gauges the movements of some of the biggest banking-related companies, has edged above $10, a level it has not seen since Jan. 28. JPMorgan Chase comprises 13.6 percent of the XLF, while Wells Fargo makes up about 8.1 percent of the fund and Bank of America is another 4 perccent.

"That's an emotional number for most people," Nadav Baum, managing director of investments at BPU Investment Management in Pittsburgh, says of the XLF's move above $10. Baum owns the XLF, as well as Bank of America convertible preferred stock that can be moved to common shares, and he says the market psychology towards the banks is beginning to turn.

"There are a lot of people feeling that there are still a lot of trap doors in these financials, but they're getting more transparent," he says. "What you're starting to see in these companies is it's not as bad as everybody thought it was going to be."

That's important for the performance of the broader stock market.

While conventional wisdom is that the banking sector likely might not lead the market into another legitimate bull run, most analysts doubt a real rally can happen without the group at least participating. Bank stocks led the market Monday even though the broader averages spent most of the day negative.

"They've got to stabilize to keep legs to the market," Baum says. "I'm not so sure it's going to be a leadership issue, but they have to do well."

• Complete Earnings Coverage

CONTINUED : Enthusiasm May Be 'A Bit Overdone'

---

1 | 2 | Next >