Bank earnings may disappoint, but it won’t derail an explosive rally this year: Dick Bove

Bank earnings could underwhelm investors, but it won't matter to the market, says veteran analyst Dick Bove.

J.P. Morgan and Wells Fargo kick off big bank earnings this week, potentially fueling more gains for the stock market or putting a wrench in this record-making stretch.

But forget the short-term noise, the Vertical Group analyst said Tuesday, the bank rally could be explosive this year.

"Who cares what happens in the fourth quarter? It's ancient history," Bove said Tuesday on CNBC's "Trading Nation." "What we care about is if we get this investment banking thing going, if we get these loans happening, banks will make a lot of money in 2018."

The key to industry activity this year will be investment banking, which Bove predicts will see a sharp pickup. The reason is twofold: well-known unicorns such as car-hailing service Uber could float their shares and public companies could bring more stock to market, both stemming from current enthusiasm for equities.

On top of the predicted recovery in investment activity, banks currently have a lot of liquidity to work with. That will only support earnings should the U.S. economy improve as expected.

"These banks are sitting with a massive amount of underutilized earning capacity," said Bove, calculating $3.7 trillion in the banking sector that is currently available. "If the economy were to rise with any degree ... that liquidity would be put to work and bank earnings would go up very sharply in 2018."

Goldman Sachs could be the best of the bunch, said Bove, as it is perfectly poised to benefit from a revival in investment banking and trading. Vertical Group rated Goldman as a sell for most of 2017, but switched it to a buy on the firm's sunny outlook for investment and trading activity.

Goldman's stock was the worst performer of the major banking and investment companies in 2017, clocking a 6.4 percent gain for the year. That was slightly less than the 10 percent rise by shares of Wells Fargo but a fraction of the gains of more than 20 percent seen by Citigroup, JPMorgan, Bank of America, and Morgan Stanley.

Before a possible 2018 earnings surge, fourth-quarter results will be dissected and the major banks are likely to see the same problems that hounded the industry over the first three quarters of 2017. Bove noted weak trading, soft loan volume and little benefit from the Federal Reserve's rate increases as possible pressures on earnings in the recent quarter.

"The net of it is most of the earnings improvements [that] will occur will be in keeping costs down, keeping loan losses down and therefore, you'll get a slight improvement in earnings but nothing exciting," he said.

Banks are set to report for the fourth quarter at the end of this week and the next. BlackRock, J.P. Morgan Chase, and Wells Fargo are scheduled for Friday. Next week, Citigroup is slated for Tuesday, Bank of America and Goldman on Wednesday, and Morgan Stanley on Thursday.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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