FBB Capital sees support from bank earnings despite tech concentration

FBB Capital Partners senior portfolio manager Mel Casey expects the upcoming third quarter earnings season to provide support for the broader market, despite concerns over heavy concentration in technology stocks. The financial sector is set to kick off the reporting cycle next week, with money center banks scheduled to begin reporting on Tuesday.

Casey noted that recent declines in financial stocks align with rising interest rates over the past month or two. However, he pointed to strong earnings results from the previous quarter, which extended beyond major banks to smaller institutions. Those results indicated significant lending and business activity across the country, signaling healthy economic growth that should underpin market performance if the trend continues.

Analysts anticipate a roughly 25% increase in third quarter S&P 500 profits from a year earlier, according to Bloomberg Intelligence data. While Casey acknowledged these high expectations, he cautioned that the prior quarter's results were driven by one-time items. He emphasized that investors and analysts will focus on core operating numbers rather than these temporary boosts. Casey cited Alphabet as an example of a company whose one-time gains helped drive market momentum last quarter, arguing that recurring earnings are a more reliable indicator of health than isolated spikes.

The market composition remains heavily skewed toward technology, which now accounts for 40% of the index. Casey described this as a concentrated position, noting that the "Mag Seven" effect has intensified in recent months. This shift contrasts with the first half of the year, which saw a broader distribution of returns. Recent interest rate moves have pushed the market back toward lower breadth, a situation Casey characterized as less exciting for investors.

Despite the concentration risks, Casey identified valuation as a key positive factor. He observed that earnings have grown faster than the stock market overall, leading to a compression in valuations from 22 times to 20 times. He highlighted Nvidia as an example of a high-growth company that is valued at roughly the same multiple as the broader market, suggesting it is reasonably priced relative to its growth trajectory. Casey concluded that in the current environment, valuation metrics are the primary factor supporting market confidence.