US equity markets reset

This week should allow for a degree of “relative” temperance to take hold in markets. After a week that saw volatility recede sharply, equity prices post their largest weekly gain in years and investor confidence re-emerges. In the process, and given the fact that investors have now been inoculated to the reality of a rising interest rate environment, the focus will shift back primarily to earnings. More specifically, investors will now increasingly look to ascertain which equity market sectors stand to gain the most positive price inertia in a landscape of tightening Fed monetary policy, an expanding economy and indications of modestly rising measures of inflation.

Historically, as a sector of the broader market, financial institutions have been primary beneficiaries of both an expanding economy and moderately rising interest rates. As the economy expands, companies increase R&D spending, consumers tend to take on more debt, spend more and as a result fuel economic growth. Financials benefit. Additionally, with rising interest rates, financials also stand to gain from expanding net interest margin (NIM). The optimism laid out by that backdrop and by the most recent earnings reports from leading names in the sector has yet to be fully priced into financials.

Over the past 52-weeks, the widely watched banking ETF, KBW Bank ETF (KBWB) has risen 18.91% versus the S&P 500 which has risen 18.51%. The 500 P/E is 22.09. Over the same period, the Dow Industrials have risen 25.17% and the Nasdaq Composite has leapt 25.40%. They have P/E’s of 20.33 and 36.26 respectively.

The P/E ratios of the companies held by the KBWB are well below the broader equity market indices. Wells Fargo, for example, sports a P/E of 14.62. Bank America’s P/E is less compressed at 20.49. Rounding out the top three holdings of the ETF is JPMorgan Chase with a P/E 18.17.


A more widely followed financial sector ETF, the Financial Select Sector SPDR ETF (XLF), has performed in line with the KBWB over the same 52-week period but is also littered with component companies that have relatively compressed P/E ratios.

Given the constructive backdrop for the U.S. economy, the expected, measured and deliberate data-driven approach by the Fed to tightening monetary policy in coming quarters and the relative value found in the sector–financials may outpace the broader market in coming quarters.



Large-cap companies providing Q4 results this week include retail giants Walmart (WMT) and Home Depot (HD). In particular Walmart’s results, due out this morning, will provide significant insight into their ongoing and evolving corporate strategy to battle Amazon (AMZN). That battle is being fought on many fronts from apparel to groceries from digital to delivery. Consensus estimates have Walmart’s Q4 results coming in with an EPS gain of 4.6% and revenue growth of 3%. Home Depot is expected to report EPS growth of 12.5% while revenue climbs 6.6%.

This week’s economic calendar is shy one trading day for President’s Day. It is also light in terms of data releases. As a result, we will be hearing from more Fed officials than we have recently. Seven talks are scheduled for Wednesday through Friday. Fed officials aside, the primary focus for investors in terms of the calendar this week will be the Wednesday release of the FOMC Minutes from the last meeting. Also on Wednesday, we receive the PMI Composite Flash reading for February. Bloomberg consensus is calling for 54.0 versus January’s 53.8. Additionally, I expect the recent dramatic sell-off and modest rebound in WTI crude oil to focus investor attention on the EIA Petroleum Status Report, due out on Thursday at 11:00 AM.

Last week’s EIA Petroleum Status Report reflected a 1.8 M bbl build in crude inventories, as well as a 3.6 M bbl build in gasoline inventories. The degree to which WTI crude is able to hold last week’s gains will be largely dependent on the inventories data in the EIA report. Additionally, the Baker-Hughes Rig Count, which last week saw a decline to 1,293 from the previous week’s 1,300, could well play a role in the near-term price action in WTI crude. A draw-down in inventories in the EIA report this week in conjunction with even a modest contraction in the rig count would bolster crude prices above $60/bbl.

Flickr photo: Chris Collins

Kenny’s Commentary subscribers receive the note in their inbox Monday’s before the open Subscribe