The series of recently released earnings from finance companies has painted a disappointing picture of the sector. Several heavyweights have performed below expectations, hit by a slew of legal expenses. However, the worst seems to be over for financials and the long term prospects of this sector make it a prudent investment option. Â
Outlook for the Finance Industry
Finance isn’t one monolithic group of companies; the constituent industries in the sector range from large money center banks to regional S&Ls, insurers, brokers and specialty finance operators like credit card issuers. The REITs – which pay the majority of their earnings as dividends – also get grouped in the finance sector.
The general outlook for the finance sector, one of the 16 broad Zacks sectors within the Zacks Industry classification, is optimistic on the whole. The consensus earnings year-over-year growth expectations for 2015 stand at 12.6% compared with the S&P 500 index (SPY) year-over-year growth rate of 3.9%.
Moreover, the year-over-year earnings growth rate for the first quarter of 2015 is predicted to be 9.3% compared with the S&P 500 index year-over-year negative growth rate of 0.1%. The first quarter of 2015 is anticipated to generate earnings of around $54.2 billion. Moving on to the margins, net margin is expected to be 16.1% in the first quarter of 2015, exhibiting a year-over-year improvement.
U.S. Economy Strengthens
Along with these encouraging estimates for the year, sustained GDP growth and reduction in unemployment will also assist in improving the operating environment. The IMF upgraded its U.S. growth rate estimate for 2015 to 3.6% from the previous forecast of 3.1% on the back of an indulgent monetary policy attitude, moderate fiscal adjustment, domestic demand supported by dropping oil prices, a steady decline in unemployment and reducing inflation pressure.
Meanwhile, the World Bank has said that the slump in oil prices has helped the U.S. economy because it has increased purchasing power of consumers. The World Bank sees US expanding at 3.2%, up from prior estimate of 3%.
Nevertheless, low labor force participation, potentially weaker net exports owing to appreciating dollar, sluggish growth in the housing sector and low interest rates exhibiting the chronic weakness of demand continue to pose a challenge for the U.S economy too. Moreover, the European Central Bank’s (ECB) plan to launch a $1 trillion bond-buying program will further strengthen the dollar, heightening the pressure on U.S. exports.
Can Finance Overcome Weak Earnings?
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