Trader Talk

Earnings were good, so here's why bank stocks are down

Key Points
  • Four banks reporting earnings beat their expectations, but all are trading down.
  • New data lowered the chances for another Fed rate hike, which lowered the chances for profits from interest income.
  • Seasonal factors also explain why banks are trading down.
A pedestrian carries an umbrella while walking along Wall Street past the New York Stock Exchange in New York.
Michael Nagle | Bloomberg | Getty Images

Banks are beginning to report earnings. All four banks reporting (JP Morgan, Citigroup, Wells Fargo, and PNC) beat earnings expectations and all but Wells Fargo beat on the topline.

So why are they all trading down Friday?

There's two issues: fundamental and seasonal.

First, the soft economic data we saw Friday — retail sales, but particularly the Consumer Price Index — clearly lowered the chances for a Fed rate hike later in the year. That brought down Treasury yields, which is lowering the chances for increased profits from one of the primary profit centers for banks — interest income.

Less well-known is a seasonal phenomenon: Banks tend to trade up in the month before JPMorgan's earnings report, trade slightly down on the day of the report and are generally flat in the month after.

Here are the results for banks (represented by the SPDR KBW Bank ETF KBE) since 2010 in the month before JPMorgan reports earnings, the day of, and a month after:

Banks and earnings

One month before JPM: up 1.0%
Day of: down 0.1%
One month after: down 0.3%
Source: Kensho

Note that even a month after JPMorgan reports, banks tend to be down slightly (down 0.3 percent), while the S&P 500 is typically up 0.5 percent.

Bottom line: Expect some downward earnings revisions on second half bank earnings around lower interest income, but factor in the seasonal weakness as well.

Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.