Top Seeking Alpha Quant picks in Financial sector with earnings set to kick off

The S&P 500’s financials sector (NYSEARCA:XLF) has seen a robust performance in the third quarter, as it rose 10% in the period.

The heavyweight sector, which had fallen short in the second quarter, has managed to revive itself.

According to Seeking Alpha's Quant Rating system, the Financials sector has an average health score of 3.58. The system awards grades based on quantitative measures, like valuation, earnings growth, and recent stock performance. The highest possible score for any individual company is 5.

Progressive (PGR), American Express (AXP), Discover Financial Services (DFS) topped the quant chart, with PGR and AXP leading the pack with a quant score of 4.94, followed by DFS at 4.92. PayPal (PYPL) takes the third sport with a quant score of 4.88.

Insurer Progressive (PGR) had beaten its Q2 EPS estimates, and reported strong data on August net written premiums.

J.P. Morgan's Jimmy Bhullar, who rates Progressive overweight, has said that the positive results were due to robust margins, low attritional losses, and favorable reserve development. In August, Goldman Sachs had also upgraded the stock to Buy from Neutral

SA analyst Patrick Kroneman, called the firm a top performer in the insurance industry as it delivered impressive returns, outperforming the S&P 500 with over 1100% growth in the last decade.

In August, American Express (AXP) was downgraded by Bank of America Securities as subdued billings volume growth and the stock's current premium valuation limit its upside potential.

“American Express has demonstrated consistent revenue growth across segments, with U.S. Consumer Services leading the way. Yet, these growth rates are normalizing,” said SA analyst, Daniel Urbina.

The company had delivered a beat to its Q2 EPS estimates, but missed on its revenue.

Discover Financial Services (DFS) had beaten both its Q2 EPS and revenue estimates.

PayPal (PYPL) had turned in stronger-than-expected Q2 earnings and revenue, boosted its 2024 earnings guidance, and raised its share repurchase outlook.

Franklin Resources (BEN) bottomed the list with a quant score of 2.17, in a quarter wherein reports of federal prosecutors investigating whether an executive at the firm's Western Asset Management unit allocated profitable trades to favored accounts came out.

Franklin Resources (BEN) was also one of the stocks expected to be impacted by the Federal Reserve’s rate cut, according to UBS.

Goldman Sachs expects XLF EPS to see a fall of 1%.

According to a FactSet report, the estimated earnings growth rate for the S&P500 is 4.2% for the third quarter, with the Energy sector expected to report the largest y-o-y earnings decline of all eleven sectors at -20.9%. Utilities sector is expected to post a 3.9% earnings growth during the quarter.

The financials sector is predicted to report a year-over-year earnings decline of -0.4% for the third quarter, according to FactSet.

FactSet added, at the industry level, banks were the only industry that is expected to report a year-over-year decline in earnings at -12%, and is also expected to be the largest contributor to the year-over-year earnings decline for the sector.

The report said, if the banks industry were excluded, the estimated earnings growth rate for the financials sector would improve to 6.9% from -0.4%.

"All told, third quarter bank results look to be a mixed bag, but seeded with multiple reasons for the market to look through near term negatives, and ahead to potentially more positive conditions (and results) in 2025," said Sean Ryan, VP/Associate Director for the banking and specialty finance sector at FactSet.

"The caveat is that the Fed’s easing, while not a large factor in 3Q results, is apt to weigh on short term NIM expectations," Ryan added.

The third quarter results of some of the companies, especially banks, will also show investors if the supersized interest rate cut by the Fed has had any impact on their earnings.

Even though the cuts took place towards the end of the quarter, traders will look to assess the impact.

SA analyst, MacroGirl had expected the rate cuts to impact financials, with mixed effects on XLF due to lower NIMs and increased loan activity.