Rate Hike Selloff: Banks Ignore Direct Earnings Math

The Federal Reserve's recent rate hike was expected to boost bank profits, but the opposite is happening. Wells Fargo shares have fallen 8.4% since the September 16 announcement, and Goldman Sachs and JPMorgan Chase also dropped in the days that followed.

According to RBC analyst Gerard Cassidy, a 100 basis point rise in market rates would add $1.3 billion to Wells Fargo's net interest revenue, lifting its core earnings per share by about 4.7%. However, investors are not pricing this direct earnings math into the stock price.

The culprit behind the selloff is the yield curve, which has compressed significantly since February. A flatter curve squeezes the exact margin that rate hikes are supposed to widen, making it harder for banks to benefit from higher short-term rates.