5 Bank Stocks to Love in This 'Goldilocks' Economy

An eventful quarterly earnings season is kicking off for bank stocks such as JPMorgan Chase (JPM) and Wells Fargo (WFC).

Over-the-shoulder shot of a transaction between a bank teller and a customer in a retail bank. The teller is wearing a black suit and receiving a check from the tan-suited customer over the b
(Image credit: Getty Images)

An eventful quarterly earnings season is kicking off for bank stocks such as JPMorgan Chase (JPM (opens in new tab)) and Wells Fargo (WFC (opens in new tab)). Thanks to corporate tax cuts, results across the sector are going to be messier than usual, analysts say. But wise investors will ignore the earnings noise and focus on the big picture for the year ahead.

Bottom line: 2018 is expected to be an especially good year for financial stocks, and not just because of lower effective tax rates.

First things first. Thanks to the timing of the passage of a new tax law, accounting rules are forcing some banks to take charges in their fourth-quarter results. Indeed, we’ve already seen some heavyweights come out with big revisions to their 2017 tallies because of changes to the tax code. Goldman Sachs (GS (opens in new tab)), for example, said in late December that it would take a one-time $5 billion tax hit in 2017, mainly for repatriating earnings held abroad. Citigroup (C (opens in new tab)) and Bank of America (BAC (opens in new tab)) also announced large accounting charges related to corporate tax reform.

This earnings season might make things look complicated, but the simple reality is that tax cuts are good for banks. More importantly, economic and financial conditions were quite favorable for banks even before changes were made to the tax code. Analysts at Keefe, Bruyette & Woods say, “This is a Goldilocks economic setting ideal for financial stocks – not too cold to worry about declining (interest) rates ... and not too hot to set the stage for much higher market volatility.”

Against this backdrop, a combination of solid fundamentals, lower effective tax rates and attractive valuations make these five large and midsize bank stocks look like winners, regardless of how this earnings season plays out.

Data is as of Jan. 11, 2017. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price. Companies are listed alphabetically.

Dan Burrows
Contributing Writer, Kiplinger.com