Financial service stocks took a beating Wednesday, falling 1.4% compared to the S&P 500’s (^GSPC) drop of 0.6%. J.P. Morgan’s (JPM) disappointing fourth quarter may have set the tone for the other banks who are ready to report results. “I think what we are going to see in general, they are going to disappoint,” observes Tom Lydon, Editor, of ETFtrends. He also notes that negative sentiment may also be contributing to the market’s volatility. “The market has been a little bit challenged this week.”  

The four remaining financial firms reporting over the next several days, including Bank of America (BAC) and Citigroup (C) Thursday, make up over 30% of the Financial Select Sector SPDR (XLF). “Within that you're going to get one-third of the reporting this week with the major banks,” notes Lydon who recommends using the ETF to capture a broad exposure to the sector, rather than betting on specific stocks which is more challenging. J.P. Morgan shares lost 3.4% after earnings, compared to the 1% drop in Wells Fargo (WFC) which reported a better quarter. 

Earnings Calendar:

Bank of America 1/15

Citigroup 1/15

Goldman Sachs 1/16

Morgan Stanley 1/20

Analysts have become more pessimistic about overall corporate earnings in recent weeks, according to FactSet, which reports the financial sector has registered the fourth largest drop in expected earnings growth. Profits are now expected to decline 1.7%. When the fourth quarter began analysts were expecting profit growth of 8.0%. 

The Financial Select Sector SPDR (XLF) has lost 5% already this year reflecting that pessimism, which Lydon believes may be overdone. “If you are underweight right now, wait a week," he says. In his view the banks are ready to rebound. "Later in the year we are going to see rising interest rates, as we all know banks make a little bit more money when rates are higher.” 

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