Big Bank Earnings & IPO Activity Fuel a Strong Financial Sector

SPEAKER_1 (0:02)

Welcome back to Morning Trade Live. Let's go inside out on the big banks and the financial sector. Joining us now to do that is Macrae Sykes, portfolio manager at Gabelli. Franz Macrae, thank you so much for your time this morning. You say for the big banks, expect earnings to decline sequentially after a strong Q2. So it's going to be a hard bar or high bar to clear, you think?

Macrae Sykes (0:23)

Well, I think we have to put that in context. We had record earnings in 2Q. I mean, look at Goldman Sachs. It was their highest EPS in history. We had the SpaceX IPO. So there are a lot of things going into the quarter. So sequentially, we are going to have a lower number. But if you look year over year, double-digit earnings across the board for the major banks. And so we're a pretty healthy environment for the backdrop and volumes and so on.

So it should be a pretty successful earnings season and good fundamental growth.

SPEAKER_1 (0:55)

Yeah, it's interesting you mentioned some of the IPOs and the summer of S1s, which no doubt the banks very much benefited from. There has been an expectation that the deal boom could fade. I mean, just this morning, you've got the journal talking about delay with Anthropic. We already had Sam Altman talking about the delay to open AI as well. Do you think this will impact the banks in any sort of material way?

Macrae Sykes (1:19)

Well, it's certainly a tremendous lever in terms of Anthropic. I mean, the expectation that they could raise over 100 billion, if you compare that to all of last year, about 50 billion raised among all IPOs, so pretty significant. And then obviously the SpaceX IPO at around 90 billion earlier in the year. So you put those two together, you're almost significantly higher than last year. So there's still other IPOs coming. Clearly there's some headline issues with Anthropic and what may happen.

It's a big lever for the banks. We'll have to wait. It does seem like they need to raise capital. So there's some pressure there. But I think fundamentally, it's been a successful year just given the SpaceX IPO and you've seen the returns in one queue, two queue. Three queues should also be strong. So against that backdrop, I still think it's going to be a very good year and then we'll have to wait on what's going to ultimately happen with Anthropic.

SPEAKER_1 (2:17)

Sure. Okay. And we're just looking at the financials last week, for instance, a lot of people were pointing to the Fed with the expectations of the flattening of the yield curve, particularly between twos and tens. But there was also this Bank of America commentary that was made at a conference last week about investment banking fees coming off a bit. I mean, what have you made of some of this commentary just in recent weeks?

Macrae Sykes (2:45)

Yeah. So I think going into earnings, the group as a whole is up around 8 percent for the year. So fundamentally, given the double-digit earnings gains we expect, we still see upside across the board. But there is a little bit of dispersion within those banks. Last week, a number of them were at a conference and presented, and we got the reaction, the Bank of America, a little disappointing on some of the fee outlook and maybe the expense management around that, and pretty significant drowned out in the shares at around 5%. And on the flip side, we got a positive update from JPMorgan and a good reaction there.

So again, the fundamentals continue to be good for these companies. You have to figure out the expectations around it in the short term. But ultimately, we think that your earnings gains over the next couple of years are going to be pretty strong.

SPEAKER_1 (3:35)

I'm just wondering also about some of the multiples at this point here as well. I mean, trading just south of 15 times forward earnings versus the almost 19 for the broader S&P 500 here. I'm just wondering what you make of the valuation at this point, given that, you know, obviously the sector has had this discount that it's carried for what?

Quite a significant amount of time over a decade at this point.

Macrae Sykes (4:03)

Right. Well, clearly, the capitals have changed since the financial crisis. And so that there's been some constraint in ROEs, although some improvement over the last couple of years. You know, these banks always come with credit risk. So it's a different dynamic than the broader corporate entity. You know, you mentioned it, 19 times earnings. So I think there will be a natural discount there, just given the balance sheet risk, et cetera. Although the growth of earnings has been pretty strong.