Analysts are counting on the financial industry to snap nine straight quarters of earnings declines for the S&P 500. Without financial firms, income for companies in the index may fall 2.8 percent on average. With them, profit is forecast to jump 62 percent, the most in 21 years, data compiled by Bloomberg and S&P show.

Combined profit for banks, brokerages and insurers in the S&P 500 will rise to $19.51 a share in 2011, up threefold from 2009, Bloomberg data show. The companies trade for 10.5 times that forecast, the second-lowest multiple behind energy companies. The S&P 500 is priced at 12.4 times 2011 income, according to the data.

Banks and brokers may also be cheap relative to their assets minus liabilities. The industry is valued at 1.15 times book value, or 43 percent below the past decade's average, Bloomberg data show.

Bank of America is forecast to post the largest gain among the biggest U.S. banks, data compiled by Bloomberg show. Profit may climb to 93 cents a share in 2010 from a 20-cent loss last year, analysts say. It is rated "buy" by 25 of the 32 analysts with ratings on the stock, Bloomberg data show.

Economic Expansion
"What we're looking at is an improvement in the economy that will result in consistent declines in loan losses over the next two or three years, which will result in huge increases in bank earnings," Richard Bove, an analyst at Stamford, Connecticut-based Rochdale Securities LLC, said in a Jan. 7 interview on Bloomberg Radio. He recommends investors purchase Bank of America, based in Charlotte, North Carolina.

Profit at Pittsburgh-based PNC is forecast to climb 44 percent through 2011, giving the shares a price-earnings ratio of 11.9, Bloomberg data show. Cincinnati-based Fifth Third may post profit of 79 cents a share in 2011, reversing a loss of 67 cents last year and giving it an earnings multiple of 14.

"The bank group in general is still trading at a historically cheap level," said Portales's Thompson. "There's the potential for significant price expansion once banks transition from trading on tangible book to projected earnings."

Eoin Treacy's view Anyone holding bank shares went through a truly traumatic experience following the Lehman Bankruptcy with just about every financial share collapsing in value. Today, a small number have regained most or all of the decline, some are trending relatively consistently while a number of others remain prime candidates for a lengthy convalescence if they are not taken over or go bust. Over the last year the better performing banks have posted earnings well in excess of analysts' earlier expectations, with trading profits and a steep yield curve driving positive results.

The S&P500 Banks sector bottomed in March with the wider market and while it was an initial relative performer, at least in part because it was rallying from such a low level, the Index has been ranging since August. Both the absolute and relative charts share a similar pattern. Banks are currently rallying towards the upper side of the five-month consolidation and a sustained move below the December lows would be required to question scope for the Index to perform more or less in line with the wider market. However, there is the world of difference between the leaders and laggards of the USA's financial sector. (Also See Comment of the Day on December 10th and October 1st)


Some of the better performing bank shares have been ranging for much of the last five months and in the process unwound the overbought condition built up following the impressive rally from the March low. For JP Morgan, which is retesting its highs, a sustained move below $40 would take out the progression of higher reaction lows, pull back into the previous range and break through the 200-day moving average. In the absence of such a move the upside can probably continue to be given the benefit of the doubt. Wells Fargo has had a more pronounced loss of momentum but is currently rallying, having found support in the region of the 200-day moving average and a sustained move below $25 would suggest a more pronounced period of underperformance is underway. Goldman Sachs trended consistently higher until October but has since pulled back into a correction which found support in the region of the 200-day moving average from mid-December. The trend has lost consistency and a sustained move below $155 would suggest the share is entering a more sustained period of underperformance.

American Express remains in a consistent uptrend and continues to form another range above $40. A sustained move below $35 would be required to mark a major inconsistency for the medium-term uptrend. T.Rowe Price has posted three similar sized ranges since May, which have tended to dip into one another. The most consistent aspect of the trend is the progression of higher reaction lows which would need to be taken out, with a sustained move below $47, to question potential for further higher to lateral ranging.

PNC Financial Services Group, broke through $50 in October and consolidated the move until last week when it broke upwards again. A sustained move below $50 would be required to question scope for some further upside. M&T Bank consolidated above $60 from July but broke upwards last week and the upside can continue to be give the benefit of the doubt provided it sustains the move above $65. Comerica consolidated mostly below $30 from September but broke upwards last week and a sustained fall back into the range would be required to question scope for some additional upside.

This sample of bank shares illustrates that some of the initial upside leaders have lagged recently. None have broken their progressions of rising reaction lows but if this does begin to occur, it will be an indication that companies best positioned to benefit from loose monetary conditions are running into difficulties. This would be a warning signal for the wider market. In the meantime the sequence of higher lows remains intact and companies such as those in the paragraph immediately above have catch-up potential.