With bank earnings underway, market watcher bets on big rally for financials

Financials haven’t had a good month. The sector has fallen by more than 1 percent in three of the past five weeks and sunk to the bottom of the S&P 500 for the past 30 trading days.

One strategist is betting on a big bank comeback into year-end.

“It’s going take just a little bit of time and patience,” said John Stoltzfus, chief investment strategist at Oppenheimer, on CNBC’s “Trading Nation” on Friday. “I’m not sure exactly sure when we’ll get the yield curve to extend itself. I think we’re trapped in this flattening yield curve at this time.”

The 10-year/2-year yield curve flattened to 26 basis points last week, its narrowest level since August 2007. A flatter yield curve puts lenders at a disadvantage by squeezing profit margins.

Putting the yield curve aside, Stoltzfus sees other industry tail winds that could give banks a boost.

“As dividends increase, as buybacks actually occur, I think that will help,” he said. “If we can get beyond some of these trade concerns and people feel more comfortable with the sustainability of the U.S. economy we’ll see a pickup so we’re going to be patient for now.”

Major financial stocks sold off Friday after Wells Fargo, Citigroup and J.P. Morgan Chase reported earnings. Wells Fargo missed on profit, Citigroup on revenue, while J.P. Morgan beat on its top and bottom line.

“The results from Wells Fargo and Citi didn’t really surprise us when we looked at those based on those two companies’ performance and J.P. Morgan made a lot of sense. It looked good,” said Stoltzfus.

The three companies unofficially kicked off the second-quarter earnings season on Friday. Before the bell on Monday, Bank of America and BlackRock reported profit and revenue that beat estimates. Goldman Sachs is scheduled to release earnings on Tuesday.

As for the rest of the earnings season, Stoltzfus sees another winner.

“We think it’s going to be a good earnings season. We think the expectations for overall growth in the S&P 500 at 20 percent should be good,” he said.

Energy should spend another earnings season as leader of the pack. A surge in oil prices this year has helped profit growth.

“We think with prices as high as they are, energy will come with yet another quarter leading the other sectors in terms of earnings,” said Stoltzfus.

West Texas Intermediate crude prices rallied 14 percent from April to June. Analysts surveyed by FactSet anticipate 98 percent earnings growth in the second quarter for energy names.

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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.

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