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Will Goldman and JPMorgan Dominate Once Again in 2017?
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It has been a roller coaster ride for finance sector stocks in 2016. The year begun on a pessimistic note as slump in oil prices, low client activity, Brexit-related concerns and slowdown in China significantly hurt the financials.
Nonetheless, the sector showed resilience and as the year progressed, these concerns gradually eased. Also, the optimism surrounding the Fed rate hike as well as the U.S. Presidential-election results cheered the investors.
Notably, among a handful of financial stocks listed on the Dow Jones Industrial Average (DJIA) index, The Goldman Sachs Group, Inc. (GS - Free Report) and JPMorgan Chase & Co. (JPM - Free Report) were the top performers of 2016. Specifically, Goldman surged nearly 33%, while JPMorgan increased almost 31% in 2016. In contrast, the DJIA grew over 15%.
Why Goldman & JPMorgan Will Outperform in 2017 As Well
Improvement in Trading Activity: We have seen how Brexit-related volatility increased trading activities in Jun–Jul 2016. Similarly, heightened investors’ concerns over uncertainties subsequent to Donald Trump’s victory should have led to a rise trading activity since November. Therefore, trading revenues for Goldman (significant part of its revenue) and JPMorgan should record an improvement in the quarters ahead.
Investment Banking Strength: With gradual stability recorded in the capital markets subsequent to disappointing first-half 2016, global investment banking activities have witnessed a rebound. Per the latest Thomson Reuters data, JPMorgan and Goldman hold the top two spots in the overall investment banking league table for 2016.
While these companies are expected to record a fall in investment banking fees in 2016, this is mainly due to difficult first-half 2016 comparisons. With continued stabilization of the global economy and probability of lower corporate taxes under Trump regime, M&As and bond as well equity underwritings should witness an uptick. So, these are expected to support Goldman and JPMorgan revenues in 2017.
Optimism Surrounding Hawkish Fed Stance: Financial sector is one of the biggest beneficiaries of the rate hike. In Dec 2016, the Federal Reserve finally hiked the interest rates, ending months of speculation about the timing of the rate hike.
Further, taking a hawkish stand, the Fed now expects three more rate increases this year, signaling confidence in the U.S. economy. Traditionally being an investment banking firm, Goldman is gradually diversifying its revenue base and undertaking efforts to boost the GS Bank's business. So, in the rising rate environment, interest income for both Goldman and JPMorgan (a traditional bank) should improve.
Potentially Lesser Regulations: Increased regulations, since the 2008 crisis, substantially hampered growth prospects for finance stocks, with Goldman and JPMorgan not remaining untouched. These stringent regulations require the financial companies to maintain higher capital levels, bear rising compliance costs and limit their flexibility in several business activities.
Nonetheless, under the Trump regime, a repeal or considerable change in Dodd-Frank Act, which was adopted in the wake of the financial crisis, is expected to support the companies’ bottom line to some extent. Notably, Trump's transition website says, "The Financial Services Policy Implementation team will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation."
Valuation Looks Compelling: Both Goldman and JPMorgan are undervalued with respect to their respective Price-to-Earnings (P/E) and Price-to-Book (P/B) ratios. Goldman has a P/E ratio of 15.28 compared with the industry average of 16.47. Also, Goldman’s P/B ratio of 1.27 is below the industry average of 1.47.
Similarly, JPMorgan has a P/E ratio of 14.64 compared with the industry average of 15.64. Further, the bank’s P/B ratio of 1.36 is below the industry average of 1.41.
Rising Earnings Estimates: For Goldman, over the last 60 days, the Zacks Consensus Estimate for 2016 rose 4.3% to $15.67 and advanced nearly 3% to $18.35 for 2017. The company has long-term expected earnings per share (EPS) growth rate of 11.6%.
Also, the Zacks Consensus Estimate for JPMorgan moved up 1.2% to $5.89 for 2016 and 4.2% to $3.21 for 2017, over the last 60 days. Currently, the company has a long-term expected EPS growth rate of 4.7%.
Therefore, looking closely at the above-mentioned factors, surge in shares of Goldman and JPMorgan is expected to continue this year too.
Image: Bigstock
Will Goldman and JPMorgan Dominate Once Again in 2017?
It has been a roller coaster ride for finance sector stocks in 2016. The year begun on a pessimistic note as slump in oil prices, low client activity, Brexit-related concerns and slowdown in China significantly hurt the financials.
Nonetheless, the sector showed resilience and as the year progressed, these concerns gradually eased. Also, the optimism surrounding the Fed rate hike as well as the U.S. Presidential-election results cheered the investors.
Notably, among a handful of financial stocks listed on the Dow Jones Industrial Average (DJIA) index, The Goldman Sachs Group, Inc. (GS - Free Report) and JPMorgan Chase & Co. (JPM - Free Report) were the top performers of 2016. Specifically, Goldman surged nearly 33%, while JPMorgan increased almost 31% in 2016. In contrast, the DJIA grew over 15%.
(Looking for the Best Stocks for 2017? Be among the first to see our Top Ten Stocks for 2017 portfolio here.)
Why Goldman & JPMorgan Will Outperform in 2017 As Well
Improvement in Trading Activity: We have seen how Brexit-related volatility increased trading activities in Jun–Jul 2016. Similarly, heightened investors’ concerns over uncertainties subsequent to Donald Trump’s victory should have led to a rise trading activity since November. Therefore, trading revenues for Goldman (significant part of its revenue) and JPMorgan should record an improvement in the quarters ahead.
Investment Banking Strength: With gradual stability recorded in the capital markets subsequent to disappointing first-half 2016, global investment banking activities have witnessed a rebound. Per the latest Thomson Reuters data, JPMorgan and Goldman hold the top two spots in the overall investment banking league table for 2016.
While these companies are expected to record a fall in investment banking fees in 2016, this is mainly due to difficult first-half 2016 comparisons. With continued stabilization of the global economy and probability of lower corporate taxes under Trump regime, M&As and bond as well equity underwritings should witness an uptick. So, these are expected to support Goldman and JPMorgan revenues in 2017.
Optimism Surrounding Hawkish Fed Stance: Financial sector is one of the biggest beneficiaries of the rate hike. In Dec 2016, the Federal Reserve finally hiked the interest rates, ending months of speculation about the timing of the rate hike.
Further, taking a hawkish stand, the Fed now expects three more rate increases this year, signaling confidence in the U.S. economy. Traditionally being an investment banking firm, Goldman is gradually diversifying its revenue base and undertaking efforts to boost the GS Bank's business. So, in the rising rate environment, interest income for both Goldman and JPMorgan (a traditional bank) should improve.
Potentially Lesser Regulations: Increased regulations, since the 2008 crisis, substantially hampered growth prospects for finance stocks, with Goldman and JPMorgan not remaining untouched. These stringent regulations require the financial companies to maintain higher capital levels, bear rising compliance costs and limit their flexibility in several business activities.
Nonetheless, under the Trump regime, a repeal or considerable change in Dodd-Frank Act, which was adopted in the wake of the financial crisis, is expected to support the companies’ bottom line to some extent. Notably, Trump's transition website says, "The Financial Services Policy Implementation team will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation."
Valuation Looks Compelling: Both Goldman and JPMorgan are undervalued with respect to their respective Price-to-Earnings (P/E) and Price-to-Book (P/B) ratios. Goldman has a P/E ratio of 15.28 compared with the industry average of 16.47. Also, Goldman’s P/B ratio of 1.27 is below the industry average of 1.47.
Similarly, JPMorgan has a P/E ratio of 14.64 compared with the industry average of 15.64. Further, the bank’s P/B ratio of 1.36 is below the industry average of 1.41.
Rising Earnings Estimates: For Goldman, over the last 60 days, the Zacks Consensus Estimate for 2016 rose 4.3% to $15.67 and advanced nearly 3% to $18.35 for 2017. The company has long-term expected earnings per share (EPS) growth rate of 11.6%.
Also, the Zacks Consensus Estimate for JPMorgan moved up 1.2% to $5.89 for 2016 and 4.2% to $3.21 for 2017, over the last 60 days. Currently, the company has a long-term expected EPS growth rate of 4.7%.
Therefore, looking closely at the above-mentioned factors, surge in shares of Goldman and JPMorgan is expected to continue this year too.
Currently, JPMorgan carries a Zacks Rank #3 (Hold), while Goldman sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.