As quarterly earnings season kicks into gear this week, no sector will be more important than banks.
Besides being a pivotal growth engine for the U.S. economy, the industry will serve as a barometer for what to expect in the era of a volatile new president and the first sustained interest rate increases in more than a decade.
On the surface, there's reason for optimism: Profits are expected to be robust enough that the group will show the sharpest gains of any of the 11 sectors. For the quarter, banks as a particular group should show 10 percent earnings growth over the same period in 2016, while financials broadly probably grew 14.3 percent, according to FactSet projections this week.
While bank bottom lines look strong, the growth number will be the beneficiary of an easy comparison, as the first quarter of 2016 featured a sharp market slide led by financials.
At the same time, the industry is showing considerable weakness at its core — commercial lending, which should be booming as American industry gears up for expansion, instead has languished since Donald Trump's presidential victory in November.
"Since the election, bank industry loan growth has decelerated sharply," Goldman Sachs analyst Richard Ramsden said in a note. Ramsden said conditions such as rates that remain low, and expectations for capital spending that are high should support the bellwether commercial and industrial loan portion of bank businesses.
"However, (year to date) we have seen the exact opposite as growth has slowed materially," he added. "We believe political uncertainty has led companies to take a pause before making incremental investments."
Of course, a change in the political winds where investors and businesses would grow confident once more that Trump will be successful in implementing his pro-growth agenda could boost lending again.
But it hasn't been just so-called C&I lending that has fallen. Mortgage originations likely fell 27 percent over the previous quarter, and refinancings declined sharply as well, according to financial services firm Keefe, Bruyette & Woods.
KBW had been forecasting loan growth to hit 4.1 percent; it has since cut that expectation to just 1.2 percent, with the possibility of more troubles ahead.
"We believe the combination of higher rates and political uncertainty weighed on loan growth in the first quarter, and political uncertainty around tax reform and the ultimate success of a pro-growth agenda may weigh on second-quarter loan growth," KBW analysts Brian Kleinhanzl and Michael Brown said in a note.
Still, analysts retain a generally positive tone.
Full-year earnings for financials — a group that also includes insurers, diversified financial services companies and capital markets firms — likely will increase 12.1 percent on a 3 percent gain in revenue, according to FactSet estimates.
A robust quarter for debt issuance, initial public offerings and other such activity generated $9.7 billion in investment bank revenues, according to data provider Dealogic. Even absent loan growth, bond trading was brisk despite a weak quarter for equities, according to industry analysts.
Banks could use some good news. After bursting higher after Trump's election, bank shares of late have been lackluster. The SPDR Bank exchange-traded fund, which tracks the industry's top names, is off about 6.5 percent over the past month
"There's probably still some uncertainty in the market," said Joo-Yung Lee, head of North American financial institutions at Fitch Ratings. "There's a lot of uncertainty around corporate tax reform, so that's maybe putting off some deals as people are trying to figure out whether or not that's likely to materialize."
In addition to the misgivings over politics, the industry also has to wrestle with the rate climate.
The Federal Reserve enacted quarter-point rate hikes in December and March and is expected to raise its benchmark rate twice more in 2017 and perhaps three times again in 2018.
Some investors are assuming that higher rates automatically boost bank profits through higher margins, but rate hikes thus far have not materially widened the difference between yields of various maturities, or what is referred to in the industry as the "yield curve."
Lee said investors will need to watch individual banks for which will benefit, while analyst Dick Bove has warned that bank stock gains have been outsized based on misplaced belief over what will benefit financials.
Bove, vice president of equity research at Rafferty Capital Markets, thinks banks will do best when they concentrate on growing their businesses rather than returning capital to shareholders.
"It is quite possible that bank stocks will remain under pressure until such time as bank managements begin to focus on growing their businesses first and their stock prices second," he said in a note. "In the past quarter, the desire to give away bank capital has not helped either."
Watch: Battle over big banks