Financial Shares Prop Up U.S. Indices

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U.S. stocks continued their bull run on Wednesday amid gains sparked by the banking sector. Favorable 1Q2016 earnings results posted by JPMorgan, the largest U.S. bank in terms of assets, and hopes that major oil producers would reach an agreement to trim crude production helped lift banking shares.

All the major indices posted gains, some rising to their highest levels in many months. JPMorgan posted EPS for 1Q2016 that topped projections and given its standing as the largest bank by assets, investors are bettering that the financial sector will be characterized by gains this season.

Among the Dow components, JPMorgan registered the highest gain. The spike of financial stocks also lifted the KBW Nasdaq Bank Index, which tracks large U.S. commercial lenders. KBW gained 3.9%, thus offsetting its 2016 decline to just 9.2%. The decline was steeper before the surge in financial stocks on Wednesday.

Dow scales to new high

The rise of the banking sector saw the Dow Jones Industrial Average shot to its best position since November 2015. The index rose 1.1% to stop at 17908.28, closer to the 18000 level it attained last July. With the Wednesday gain, Dow only stood 2% shy of its record-high level of 18312.39 attained in May 2015.

The S&P 500 added 20.70 points or 1% to finish the day at 2082.42. Financial sector is the worst performing component of the S&P 500 this year. Of the various S&P 500 sectors, technology is the last followed by financial.

The Nasdaq Composite followed a similar curve, gaining 75.33 or 1.5% to end the day at 4947.42.

Is the bar too low?

Although JPMorgan crashed expectations and other major banks may do the same, analysts are questioning whether the bar for 1Q2016 earnings has been set too low. It turns out that nearly three-quarters of S&P 500’s financial sector companies had their earnings estimates trimmed by analysts.

Issues of low interest rate, decay of oil prices and tough regulations have clouded the picture for financial companies, leading analysts to cut their estimates for the sector. But if banks are beating estimates just because the bar is too low, the rally in the financial sector may be short-lived.

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