One of the hottest trades of the year may get a boost from the earnings season.
RBC Capital Markets’ Gerard Cassidy expects the economy to exceed Wall Street expectations when they begin reporting this week.
“The big beats are likely to come from the release numbers on loan losses,” the firm’s head of the US bank’s equity strategy told CNBC’s “Trading Nation” on Friday. “Last year, due to the pandemic, the banking sector set aside billions of dollars in expected credit losses, and the reserves for those losses were not used.”
Finance was the third S&P 500 group in 2020 to be worst off, behind energy and real estate. So far this year, the Financial Select Sector SPDR Fund, which tracks the group, has risen more than 19%.
According to Cassidy, that is about to change. He believes the banking sector will be among the best this year due to the unprecedented economic recovery.
“It was not included last year when the banks set aside this money to cover these losses,” he said. “So we expect in the first quarter that it will be the major driving force for the earnings layer, partly offset by a slower growth in net interest income and perhaps also some net interest rate pressure.”
JPMorgan Chase heralds earnings season on Wednesday – along with Goldman Sachs and Wells Fargo.
Cassidy expects Bank of America, which reports quarterly results on Thursday, to be the biggest winner. It has increased by 32% so far this year.
He lists strong leadership, its broad exposure to the U.S. recovery and various revenue streams as the main bullish factors.
“Ninety percent of their business comes from the United States,” Cassidy said. “When the Federal Reserve predicts the growth of this country’s economy of 6%, they will be one of the biggest recipients of this growth.”
Cassidy names Credit Suisse as the bank facing the most challenges right now. He cites his massive losses in connection with Archegos Capital’s hedge fund implosion.
“There have been a number of management changes over the years in that organization,” Cassidy said. “Because of this, controls and procedures may not have been as solid as they have been with some of the domestic U.S. companies.”
Shares in Credit Suisse are down less than 26% since March 1st.
Disclosure: RBC Capital Markets has investment banking relationships and / or non-investment banking relationships with JPM, BAC MS, GS and CS.