The US banking sector is approaching a high point, and the earnings season may further rally due to expectation discrepancies

According to Zhitong Finance APP, as major banks in the United States officially kick off the earnings season this week, strategists point out that the current market's conservative attitude towards Wall Street's profit expectations may create favorable conditions for the continued strong performance of bank stocks.

Recently, the banking sector has seen significant gains, with the KBW Bank Index, which includes 24 institutions such as JP Morgan (JPM.US) and Citigroup (C.US), having risen approximately 37% since its low in April, currently approaching historical highs. This increase not only surpasses the performance of the S&P 500 index during the same period but also exceeds the approximately 31% gain of the tech-heavy Nasdaq 100 index.

It is noteworthy that there is a significant expectation gap in the market regarding the earnings of financial stocks. Bloomberg Industry Research data shows that although the financial sector is expected to contribute 18.6% to the overall earnings of the S&P 500 index, its current weight in the index is only 13.7%. This gap has exceeded the average level of the index over the past 15 years.

Analysts predict that the S&P 500 financial stock index's earnings will decline by about 1% year-on-year in the second quarter. Bloomberg strategists Gina Martin Adams and Michael Casper pointed out in their report: "Investors generally hold a cautious attitude towards the earnings expectations of financial stocks, which means that if actual profit performance exceeds expectations, there is still room for the sector to rise."

This week will see the earnings reports from several heavyweight banks, with JP Morgan, Citigroup, and Wells Fargo (WFC) set to disclose their results on Tuesday, followed by Goldman Sachs (GS.US), Morgan Stanley (MS.US), and Bank of America later in the week. The improvement in the regulatory environment has become an important positive factor supporting the sector. KBW analyst Christopher McGratty believes that the banking industry is experiencing a "significant positive regulatory shift," with large institutions like JP Morgan and Bank of America being the main beneficiaries of policy easing.

As the Federal Reserve completes stress tests this month, the market generally expects banks to update their capital management plans, including potentially increasing stock buyback sizes, while the potential weakening of Basel III international capital rules will further release capital flexibility.

Expectations for growth in trading business revenue also boost market confidence. Following the announcement of the "liberation day" tariff policy by the Trump administration in April, some companies' trading volumes reached new highs. However, the sector still faces multiple challenges: the current 12-month price-to-earnings ratio of the S&P 500 financial stock index is about 17 times, higher than the 10-year average of 14 times.

The specific impact of the trade war on bank profits, the uncertainty of the Federal Reserve's interest rate cut path, and potential fluctuations in consumer credit quality all pose downside risks. Earlier this month, HSBC downgraded the ratings of JP Morgan, Goldman Sachs, and Bank of America, citing "macroeconomic uncertainty."

However, proponents argue that regulatory easing and profit growth will drive the sector to continue rising. Wells Fargo analyst Mike Mayo stated: "Current stock prices do not fully reflect the potential for improvement in the industry's fundamentals." This strategist, who accurately predicted the rebound of financial stocks in early 2023, emphasizes that under the combination of multiple favorable factors, bank stocks still have upward momentum