Daily Traders Edge

Here’s Why Big Bank Stocks Are About To Crumble

April 16
10:25 2018

The bank stocks have had a fantastic run with the NASDAQ KBW Bank Index (BKX) surging by nearly 55% since November 8, 2016, rising from roughly 75.50 to 116.50 on January 30, 2018. Dreams of higher interest rates, deregulation and tax cuts has boosted bank profits. The S&P 500 has also surged over the same period, jumping by nearly 32%. But since January 30, the bank index has dropped from approximately 116.50 to 106.40, a decline of about 9%, vs. a drop of only 5% for the S&P 500. (For more, see also: Top 4 Bank Stocks for 2018.)

Signs are emerging that bank shares may be set to tumble further, as earnings estimates suggest a significant slow down in earnings growth. A technical analysis of the NASDAQ KBW Bank Index suggests a decline of nearly 8.5% from its price of approximately 106.40 on April 13.

Technical Breakdown

The bank index has recently fallen below an uptrend that began in the summer of 2016. After the election of President Trump, the bank stocks continued to rise along that uptrend but has now fallen below it, as of the end of March. Despite several attempts, the index has been unable to rise back above the critical trend line. The relative strength index (RSI) is also trending lower and would need to fall below 30 to reach oversold conditions, from its current level around 45. The next region on the chart of technical support comes around 97.5, a decline of 8.5%.

Slowing Growth

Earnings on the banks are expected to slow considerably in 2019 and 2020, from a blistering pace in 2018. JP Morgan Chase & Co. (JPM) is expected to see its earnings grow by over 30% in 2018, but that growth is expected to decline to only 8.6% in 2019, and 8.2% in 2020. Meanwhile, Citigroup, Inc. (C) is expected to see its earnings growth drop from 26% in 2018, to only 15.7% in 2019, and 16% in 2020. But what may be even more problematic is Citigroup’s earnings growth is expected to come on even slower revenue growth rates. In fact, Citigroup is only forecast to see its revenue grow by 4% in both 2019 and 2020.

Continue Reading at  Investopedia

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