U.S. tax cuts, rising interest rates and a red-hot economy are combining to create a near-perfect growth environment for U.S. banks. Peter Ashton, Vice-President, Trading Central, talks to Kim Parlee about whether this could be the right time to invest in U.S. financials.
US tax cuts, rising interest rates, and a red-hot economy are combining to create a near-perfect growth environment for US banks. So could this be the right time to invest in US financials? Joining me from Ottawa is Peter Ashton. He's vice president at Trading Central, a firm that specializes in quantitative and technical analysis.
Peter, always great to have you with us. Let's start with just the earnings picture overall. Pretty solid. Is it all those things I just mentioned? Is this just a macro-tide lifting all boats, so to speak?
Yeah. I think all three of those factors are certainly helping all the big US banks. So number one being just the red-hot economic growth in the US. The last quarter, GDP growth in the US was about 3.8% annualized, which is historically very high. And there's a lot of market watchers that expect that to continue to grow, and maybe get over 4% for the next two quarters. So that's going to be very good for all the US banks as well as other companies as well.
The second factor really is the environment of rising interest rates in the US. So there's been a couple of moves by the Federal Reserve already. We expect probably two more this year. And, of course, rising interest rates are good for banks because it increases the net margin interest spread. So that's very positive.
And then, of course, the third factor is really the declines in regulation that's also impacting the US financials.
A lot of things, as we mentioned, going right. And I think it's probably a good time to be running US banks in terms of what's going on. But in terms of standouts, in terms of some of the earnings that came out, who, for you, kind of stood above the rest in terms of what they delivered?
Yeah. So, I mean, there was a number of really great performances. But a few that stood out to me-- number one was JP Morgan. They were the first of the big banks to report their earnings. And they really hit it out of the ballpark in the second quarter. So they beat analysts' expectations very handily for both revenue and earnings.
And Jamie Dimon, the CEO of JP Morgan, talked about what was behind that and really attributed a lot of it to the economic growth that we're seeing. So that's really one of those situations of a rising tide lifting all boats. So that stock is actually up about 6% to 7% since they issued their earnings earlier in July.
Bank of America I know is another one that you think is a standout on top.
Yeah. Bank of America is actually a great story. So this is a company that back during the financial crisis, the stock was trading at less than $4 a share. Today, it's north of $31. So, over nine years, that works out to about a 30% annualized growth rate. That's great for any company.
So Bank of America did a really good job in the second quarter, beating analysts' expectations both on earnings and on revenue. And it's trading up about 7% since those numbers.
Oh, interestingly, by the--
Oh, go ahead.
By the way, one other thing I just wanted to say was that Trading Central does both technical as well as fundamental research. And Bank of America is actually one of the few large US financial services firms that we are actually bullish on in both the short term, intermediate term, and the long term.
Huh. Interesting. OK. Morgan Stanley. Sorry. I didn't mean to interrupt you there. But Morgan Stanley I know is another one that's on your nice list, not naughty list.
Yes. So they also had a great second quarter, very, very strong earnings and revenue. And Morgan Stanley is a bit different than the previous two I mentioned in the sense it's not really focused on retail banking. So their growth really was driven by capital markets and investment banking, so kind of showing that there is growth out there for a lot of different segments of the US banking business.
By the way, that company also decided to return some capital to their shareholders. They're actually increasing the dividend payout by 20%. And they're also doing a $4 billion share buyback.
It's funny, because when you were going through those, of course, we're showing the one-year chart for all these, and, I mean, they're all quite different charts. I mean, Morgan Stanley looks quite different than JP Morgan, Bank of America. How do you feel about valuations? Or is this more of an individual stock story when you come to that question?
So there's certainly an individual aspect to it, but I think the valuations generally for the large US financials, especially the banks, are very reasonable. I mean, most of the big banks are trading with forward P/E ratios between 10 and 12, which is historically very good. And if you think about market valuing a company with a P/E ratio of 10 to 12, it's really sort of saying that there isn't much growth expected from that company. A company like JP Morgan is growing its earnings in double digits. So there's certainly a lot of growth there. I think the valuations, therefore, are quite reasonable.
Let me ask you-- the one thing, of course, all of these banks are benefiting from, as you mentioned, decreased regulation, rising interest rates, tax cuts. It's been this perfect-- like a virtuous circle, if you will, in terms of what's been happening in the US economy.
But some people, of course, are looking a little further out and saying, you know, we've got trade wars. We've got tariffs coming in that could slow down the economy. We've got some political uncertainty coming as well too. So is that something, I mean, that you're concerned about, when you look out for these banks, in terms of what could be happening for them?
Well, so I think the market is concerned. I mean, I think that's probably one of the reasons why the US financials sort of lagged the rest of the-- the S&P 500 in the first half of the year. People are worried about, what happens if growth slows down? What happens if there's a trade war?
Certainly, a trade war would impact the GDP growth in the US, which would have a very negative impact on the business of the US banks. But my belief is that it hurts a lot of companies, not just the banks. And I think that politicians probably don't want that hanging over their head before they go to the polls again.
So I would guess that that's something they're going to want to try to fix fairly soon. And I think there's probably some evidence that those things are going to be fixed sooner as opposed to later. So I'm really not that concerned about tariffs or other kinds of economic derailment kind of impacting these companies in the short term.
Peter, you've got a couple other stocks I want to talk about. And I think these ones probably-- the other ones you said look fundamentally and technically pretty good. These two, maybe not as much-- Citigroup and Wells Fargo.
So, of course, not every company can outperform. So Wells Fargo was one that a lot of investors had their eye on in the second quarter. This is a company that had some scandals in 2017. The last quarter earnings were not that good. So people were really looking for, can the company turn it around in the second quarter?
Unfortunately, they have definitely underdelivered in terms of earnings and revenue in the second quarter. They didn't hit analysts' expectations for either one of those. And, in fact, when we have an environment where most of the financial services firms are growing their revenue quite significantly, Wells Fargo's revenue actually contracted in the quarter. So that's certainly a warning sign.
And, interestingly enough, the stock sold off very sharply after second-quarter earnings. But it's made back all of that and then some in the meantime. So maybe people do feel that the management's got things turned around, and perhaps the stock is beaten down enough at this point to be really attractive.
Peter, great to have you with us.
I'm going to pause there just because we're going to lose our window. But thanks so much for joining us. We'll get you back to finish up on Citigroup and a whole bunch more. Always a pleasure.
OK. Thanks very much for having me.
A pleasure. Peter Ashton. He's vice president at Trading Central in Ottawa.