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The broader stock market got some wind in its sails on Tuesday, partly because of upbeat earnings, partly because of strong U.S. housing starts in June, and partly because of speculation that Washington is nearing a deal on extending the debt ceiling. But many U.S. bank stocks have been left out of the rally.

In afternoon trading, the S&P 500 was up 17 points or 1.3 per cent, to 1322. The rally was broad, too - but key financials are still moving in the opposite direction after reporting earnings to which investors have given the thumbs down. Goldman Sachs Group Inc. was recently down 1.8 per cent and hit a new 52-week low of $125.50 (U.S.) earlier in the day. Bank of America Corp. was recently down 2.2 per cent, and hit a 52-week low of $9.40.

There was a time when financials were expected to lead the stock market out of its troubles, given their close association with economic activity. But this is clearly no longer the case. So far this year, the 24-member KBW Bank Index has slumped 12 per cent, while the S&P 500 has risen 5.2 per cent. And over the past 12 months, the differences are just as striking: The bank index has fallen 2.3 per cent while the S&P 500 has surged 23.6 per cent.

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You can certainly blame the latest lag on earnings. Goldman Sachs was moving against the rising tide of the market on Tuesday after it reported quarterly earnings of $1.1-billion or $1.85 a share, versus expectations of $2.30 a share. In particular, fees generated from fixed-income trading plunged 63 per cent from the previous quarter.

Over at Bank of America, the quarter brought a loss of $8.8-billion or 90 cents a share. While huge, it actually met expectations. However, a number of analysts took a dim view of the stock, raising the question of whether it will need to raise more capital.

"You were considering the possibility of dividend increases by the end of the yea, and now several investors asked about the idea of a potential capital raise - we've gone full circle here," said Mike Mayo, an analyst at Credit Agricole Securities, according to Bloomberg News.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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