Market Extra: Why the weakness in U.S. bank stocks since the collapse of SVB is a worrisome sign on eve of bank earnings

However, the weak performance of bank stocks since their recent meltdown could stoke concerns that there is something wrong with this critical part of the U.S. financial system, as investors continue to gauge the probability of an upcoming recession, said market analysts.

Nicholas Colas, co-founder of DataTrek Research, said it is a “worrisome sign” that the broader market has left bank stocks for dead since their meltdown in March.

While the S&P 500
SPX,
+1.33%
has risen 3.2% since March 8, when SVB first announced it had to sell all available-for-sale securities to strengthen its deteriorating financial position, the SPDR S&P Regional Banking ETF
KRE,
+1.53%,
which covers the regional banks segment of the broader S&P 500 index, has slumped 25.7%, according to Dow Jones Market Data. 

Put in year to date performance terms, the large-cap index has advanced 7.3%, while the regional banking ETF is down 26.9%. “The damage done to this group by the March swoon has not started to reverse, even by a little bit,” wrote Colas, in a Thursday note. 

In single stocks, shares of JPMorgan Chase & Co.
JPM,
+0.38%
have declined by 6.7% over the same time frame, while Wells Fargo & Co.
WFC,
+1.20%
was down 9.9% and Citigroup Inc.
C,
+0.81%
has dropped 7%, according to Dow Jones Market Data. 

“While the U.S. banking system is only 4% of the S&P 500, it is worrisome to see this group fail to show any real bounce from its recent meltdown,” said Colas. “While bank earnings calls are rarely market-moving events, this quarter might be different.”

See: Here are Goldman’s 4 things to watch for as gloomiest earnings season since pandemic begins

David Trainer, chief executive officer of New Constructs, an investment research firm in Nashville, TN, said investors are counting on strong earnings in the banking sector to boost the recent stock-market rally, and bank earnings typically set the stage for how the rest of the earnings season plays out. 

“Bank lending is arguably the most important component of a strong economy, so insights from bank CEOs are critical right now, as investors keep an eye on the trajectory of bank lending after the recent crisis of confidence in the banking sector,” said Trainer, in emailed comments.

See: These 7 tables show just how bad this ‘crisis quarter’ could be for earnings of the 20 largest banks

Milind Mehere, chief executive officer and co-founder of Yieldstreet, said the expectation for bank earnings is for “a tale of two cities.” On one hand, investors expect mega-banks to have “benefited” from the recent turmoil through the acquisition of regional bank deposit attrition, while the smaller players will be facing tough questions around their liquidity profile and options. 

“We will continue to be focused on any material signs of credit deterioration in charge-offs and delinquencies which could have outsized impacts on smaller banks through additional reserve builds and potential further pressure on their loan books on top of any interest rate impacts,” Mehere said.

U.S. stocks ended higher on Thursday as the first reports from what’s expected to be a gloomy first quarter earnings season arrived. The S&P 500 advanced 1.3%, while the Dow Jones Industrial Average
DJIA,
+1.14%
rose 1.1% and the Nasdaq Composite
COMP,
+1.99%
jumped nearly 2%.