Threat to US Bank Stocks in the Offing

US bank stocks are at a crossroads—trying to regain the momentum they had earlier in the year amid signs that the Trump-trade cornerstones that had spurred the rally are not turning out as planned.

Investors will learn more about where the nation's major financial institutions stand later in the week, when the sector kicks off second-quarter earnings season. Financials broadly are expected to show profit growth of 6%, third-best of the 11 S&P 500 sectors, according to market data tracker FactSet, CNBC reported.

"They will figure out a way to hit their earnings numbers, which are relatively low. But the revenue numbers, I think you'll see some misses," said Christopher Whalen, head of Whalen Global Advisors and an expert on the industry.

JPMorgan, Citigroup and Wells Fargo report Friday.

As banks have gotten a boost lately from positive stress-test results and plan in some cases to return record levels of cash to investors, the catalysts for more growth nonetheless appear less certain.

Commercial and industrial lending remains weak, and mergers and acquisitions and most capital markets activity have been moribund, with more active advisory activity only partly making up for the weakness in other areas.

"You're going to see (loan) volumes light and the (Wall) Street is going to have to trade on this," Whalen said. "You're refuting the core assumption of the Trump bump, which was, expenses were going to fall and there would be a loosening of credit so you could do more. In fact, you have the opposite."

Share Prices on the Rise

To be sure, things have turned up lately for banks. Rising treasury yields have been a benefit, as has the all-clear the Federal Reserve gave banks for their plans to return capital to shareholders through buybacks and dividends.

The sector stocks, as measured by the SPDR S&P Bank ETF, have jumped about 7.5% since the beginning of June, most recently getting a post-stress-test push. However, banks face a number of headwinds, most of them coming from Washington.

Goldman Sachs analysts say "policy uncertainty" continues to haunt banks, which along with energy, materials and industrials was supposed to fare best under the Trump administration's economic agenda. Goldman said the issue has particularly hurt commercial and industrial lending and M&A activity. Announced deals in the US fell nearly 16% in the first half of the year, according to Thomson Reuters.

"Commercial borrowers look to have adopted a wait-and-see approach, rather than taking on debt," Goldman said in a note to clients. "This policy uncertainty can be partially attributed to a lack of personnel in key executive positions in the new administration. ... While President Trump has fully confirmed his cabinet, we highlight that only 46 (8%) executive appointments requiring Senate confirmation have been finalized by the Senate."

Earnings estimates in general have been coming down for the banks, though the profit outlook for the financial sector remains solid. However, that 6% projected earnings gain comes down to 2.8% when excluding the gaudy 20% projected for insurers.

Early results from S&P 500 companies, however, look strong. With just 5% of the index reporting, 78% have beaten on earnings and 87% on revenue, the latter being a record-setting pace.

Power to Sue Banks

US consumers will find it easier to sue their banks and other financial companies under long-awaited regulatory reforms that the industry has complained could increase litigation costs by billions of dollars.

The US Consumer Financial Protection Bureau on Monday published proposals to curb the use of contractual clauses that require customers to resolve disputes in out-of-court arbitration.

The proposals from the CFPB, run by the Obama-era appointee Richard Cordray, run in stark contrast to the Trump administration’s financial deregulation agenda and look set to trigger a political battle.

Financial groups signaled they were gearing up to fight the plans. At stake are clauses that have been inserted into hundreds of thousands of contracts—covering products ranging from credit cards to payday loans—that require customers to waive the ability to sue companies in class actions.

Consumer advocates have argued that such clauses hinder individuals’ ability to redress wrongdoing against powerful institutions and say that arbitration stacks the decks in the company’s favor.