Bank profit leading S&P 500 as U.S. earnings growth sputters

Banks Advance

The S&P 500 Banks Index of companies such as San Francisco- based Wells Fargo, SunTrust Banks Inc. in Atlanta and Cleveland- based KeyCorp has gained 29 percent this year, on pace for its biggest rally since 1997.

“If you look at loan growth, it’s not robust, but it’s picking up,” said Walter Todd, who oversees about $940 million as chief investment officer of Greenwood Capital in Greenwood, South Carolina. Todd, who spoke in an Oct. 3 phone interview, said his firm owns BB&T Corp. “Whether they meet or miss the near-term expectations, the fundamental backdrop for these domestic-oriented banks is going to continue to improve.”

While S&P 500 earnings will reach a record $102.60 a share this year, third-quarter results may show the first decline since 2009, according to analyst projections compiled by Bloomberg. The growth rate has been slowing since the start of 2011 and was flat for the three months ending in June, as sales slowed and economists cut U.S. growth projections.

Refinancing Rise

For banks, the improvement in home lending reflects a short-term rise in refinancing driven by the Fed and profits show no real growth, according to Peter Kovalski, a fund manager at Alpine Woods Capital Investors LLC in Purchase, New York, that oversees about $5 billion. Chad Morganlander at Stifel Nicolaus & Co. said financial shares may fall as economic growth remains sluggish and Europe’s debt crisis worsens.

“One should be cautious on banks across the board,” Morganlander, a Florham Park, New Jersey-based fund manager at Stifel Nicolaus, which oversees about $138 billion in client assets, said in an Oct. 3 phone interview. “Until household credit is created without monetary or fiscal stimulus, then bank stocks are going to have a tough time providing long-term leadership.”

Consumer debt has declined to $11.4 trillion as of the second quarter of 2012, from a peak of $12.7 trillion in 2008, according to Fed data. Financial company borrowings fell $3.3 trillion to $13.8 trillion, the data show.

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