Shares of Discover Financial Services climbed 7% on Monday after the bank agreed to improve its consumer compliance and related corporate governance as part of a consent order with the Federal Deposit Insurance Corp (FDIC).
The stock was the top percentage gainer on the benchmark S&P 500 in early trading, outperforming both the broader markets and the financial sector.
“Discover Bank has been taking significant steps to strengthen the organization’s compliance management system and address the other issues identified in the consent order,” the lender said in a filing with the U.S. Securities and Exchange Commission on Friday.
In late July, Discover revealed it had received a proposed consent order from the FDIC in connection with consumer compliance.
At the time, the bank’s shares tanked after it also disclosed a regulatory review over some incorrectly classified credit card accounts from around mid-2007 unrelated to the FDIC consent order.
The company then decided to pause share repurchases as well.
As the regulatory review on the misclassification is ongoing, additional enforcement actions or other supervisory activity from the FDIC and other regulators remain possible, Discover said in filing on Friday.
Strong upcoming earnings results could reverse the decline in mega-cap technology and growth stocks, which have been hammered by the rise in Treasury yields and are trading at their cheapest levels in six years by one measure, according to Goldman Sachs strategists.
The so-called Magnificent Seven group of megacap stocks -Apple, Microsoft, Amazon.com, Alphabet, Nvidia, Tesla, and Meta Platforms - have fallen 7% over the last two months, compared with a 3% decline in the broad S&P 500, as Treasury yields jumped more than 60 basis points to 16-year highs.
Those declines have pushed mega-cap forward price-to-earnings ratios down by a collective 20% over the last two months, leaving them trading at their largest discount to the market based on long-term growth since January 2017, Goldman Sachs said in a note dated Oct. 1. At the same time, the group is expected to post sales growth of 11% in the third quarter, compared with a 1% improvement for the S&P 500, the firm noted.
The mega caps in aggregate have beaten consensus sales growth expectations 81% of the time and have outperformed in two-thirds of earnings seasons since the fourth quarter of 2016, Goldman’s strategists said.
“The divergence between falling valuations and improving fundamentals represents an opportunity for investors,” they wrote.
The bullish call on tech stocks comes as investor sentiment for equities overall has flatlined, which historically has been a contrarian indicator of more gains ahead, Savita Subramanian, equity and quant strategist at BofA Global Research, wrote in a note Monday.
The average recommended allocation to equities in balanced funds remained unchanged at 53% in September, below the benchmark of 60%, Subramanian noted. Falling sentiment has historically been a signal of broad gains over the following 12 months, she noted.
The S&P 500 has dropped nearly 5% over the last 10 trading days but remains slightly more than 11% up since the start of the year.
“We expect the S&P 500 to rally into year-end, with more upside in the equal-weighted index,” Subramanian wrote.
Their rising stock prices ballooned valuations, however, and some investors say the megacaps could be vulnerable if climbing bond yields keep pressuring stocks. The so-called Magnificent Seven stocks trade at an average price-to-earnings ratio of 31.8 based on earnings estimates for the next 12 months, according to LSEG Datastream. That far surpasses the S&P 500’s ratio of 18.1.