Earnings Recap: Financials in the Spotlight

This week was a busy one for the banking sector, as many giants posted earnings that caused greater investor interest in the industry and a new streak of optimism for the future of banking. With one exception, earnings releases resulted in bullish runs, no matter whether a gain or lass was announced. A close look at this week's events makes one thing clear: analyst expectations are driving the market more than fundamental performance, and any sign of growth, especially revenue growth, is met by a higher stock price. Let's start with the exception. Citigroup

has been a dog ever since the subprime mortgage crash, and last quarter's performance was no exception. An 11%

in the bank's earnings hit investors harder than analysts had expected, but sluggish revenue was a bigger concern, as it pointed to Citigroup's consistent inability to grow its way out of a recent contraction. When the results conference call began on Tuesday at 10:30, the stock was trading at 29.09. It fell on a consistent downward slope for the rest of the day to close at a low of just above 28.21 per share. The stock has since recovered and is trading at around the same level it was at that Tuesday morning. While Citigroup can't seem to get its act together, Wells Fargo

has shown enormous promise as it begins to capitalize on the rising mortgage demand in the U.S. market at a time when competitors such as Bank of America

are moving away from the sector. As a result, the bank's earnings slightly exceeded analyst estimates with net income at 73 cent per share despite a fall in revenue alongside Citigroup. The bank's ability to increase income while facing lower revenue is thanks to cost-cutting, but the real news was a jump in mortgage transactions, up to $120 billion for Q4 2011. Despite lower revenue, an inevitability as investment banking opportunities fell both seasonally and as a result of lower confidence in a eurozone resolution, the bank was able to target a growth market while Citigroup remained an uncertainty. Its announcement on Tuesday was met by a surge of interest followed by a more modest rally, with the share price surging to $30.59 shortly after the announcement, which was followed by a slight dip in the late afternoon that left the stock up just under a percent from the start of the day at $29.83. Since then, Wells Fargo has risen steadily and is now trading around the $30.25 mark. The third major traditional bank to release earnings this week was Bank of America, which reported a surprising jump of revenues on Thursday. The stock rallied in premarket trading on the news and stayed above the $7 for much of the day, only to fall slightly at a steady pace throughout Thursday and Friday. This is a big jump from the $6.8 mark that the bank had been trading at before the release, and bigger still from the 52-week low that the bank hit in December when Fitch cut its rating on BAC. The biggest surprise to investors and analysts alike was the bank's ability to raise its tier 1 capital ratio to almost 10% thanks partly to increased revenues from greater new credit cards and credit card usage, although smaller margins on loans offset the bank's plastic bounty. Fitch was proven wrong on its downgrades in the investment banking sector, with both Goldman Sachs

and Morgan Stanley

spiking on good news. However, the news wasn't good in itself for either bank, and some may wonder how long the jumps in stock price can last. Goldman reported a 58% fall in profits with income barely about $1 billion for Q4. When the bank made the announcement on Wednesday morning, the stock soared in premarket trading, and soared some more during the day. It closed nearly 6.8% up from opening and crossed the $105 resistance level by the end of the day. The stock is currently trading at around 108.38. However, questions linger about the sustainability of a bank that is seeing lower profits and can only save its margin by cutting employee compensation. Granted, there is plenty of room to cut pay at Goldman Sachs, but it's doubtful whether the bank can continue to inflate its stock price with falling earnings. An even more counterintuitive market response came from the news that Morgan Stanley posted a loss smaller than investors had expected. Like Goldman Sachs, Morgan Stanley has been hit by smaller trading volumes and fewer investment opportunities. MS was also hit hard by eurozone troubles, since the bank divested itself of the bulk of its $4.5 billion Italian debt, which it lowered to $1.5 billion. The bank also suffered $779 in losses thanks to a decline in revenues from its Institutional Securities arm, thanks mostly to declining opportunities to invest in corporate restructuring and merger and acquisition activity. Yet, the stock rallied. The stock opened over a point higher on Thursday after the earnings went public, and closed over 5% higher at $18.28. It has settled slightly at $18.12, but is still trading far above its pre-release level of $17.31. Next week, investors will have their eyes on some major players in U.S. markets, such as Verizon

, AT&T

McDonald's

, and Apple

, whose results will be a good indicator of whether consumer spending is on the mend. With traditional banks such as Wells Fargo becoming increasingly dependent on consumer activity for revenue, there may be a knock-off effect on their results, while investment banks with large foreign exposure will continue to hold their breath while the EU sorts out the mess in Greece.