Strong 2016 Q4 results in the financial sector continue to roll out this month. As a whole, the sector’s earnings growth totaled 17.4% in the past year behind only the Utilities sector’s earning growth of 19.9%. Specifically, Goldman Sachs, Citigroup, JPMorgan Chase, Morgan Stanley and Bank of America all enjoyed strong results in the wake of a historical post-election stock market rally. A company’s earnings, which is another way of expressing a company’s profitability, are often compared to another company through the Earnings Per Share (EPS) ratio, which indicates a company’s profitability on a share-by-share basis. Notably, Goldman Sachs reported an EPS of $5.08 beating the expected EPS of $4.76. Morgan Stanley also beat analyst expectations by $0.16, reporting an EPS of $0.81.
Recent macroeconomic trends have created a desirable climate for the financial sector. A Trump presidency has come with the bullish expectations of a conservative fiscal policy. The prospects of easing regulation and a change in tax policy have largely contributed to this sentiment. On top of that, the Federal Reserve has begun raising interest rates. For the banking industry, similar changes in policies historically have lead to an increase in profitability. For one, a conservative fiscal policy is likely to increase the risk appetite of banks across the industry. In addition, continued rate hikes from the Fed will allow banks to continuously increase their net interest margin. Essentially, this means that as interest rates increase, banks can widen the spread between the rate at which they lend money to customers and the rate at which the banks borrow money from the central bank.
Strength in the financial sector can be a good indicator as to the direction of the economy. Banks become more willing to lend as their net interest margin increases, and more money will flow through all sectors of the economy. The shift to credit products in banks is already apparent in the Q4 results. Goldman Sachs’ fixed income, currencies, and commodities revenue are up a total of 78% from last year. However, challenges exist in the coming quarters for the banks. For Goldman, equity revenues are down 9% from last year, and similar trends are reflected across other banks. Most notably, though, will be the challenge of self-managing shareholder interests and customer interests. In an economy with less oversight, banks may stand in a position where they will have to make a decision amidst the pressure to make profits and the consequences of risky practices.