Big Banks Beat: Strong Consumer Helps, But Trading Results Mixed, Rates Weigh
JJ Kinahan | Jul 16, 2019 10:55AM ET
(Tuesday Market Open) Big banks continue to grow their profits, but the initial market reaction to earnings from JPMorgan Chase (NYSE:JPM) and Goldman Sachs (NYSE:GS) looks mixed early Tuesday.
Both of the banks easily beat earnings per share estimates, but that included tax credits and other one-time items. At JPM, it looks like consumer banking was a strong suit, but investment banking and equity trading results came up short of analysts’ estimates. Equities trading fell 12% year-over-year and looked pretty disappointing. Overall revenue for JPM came in just above third-party consensus.
And JPM cut its forecast for net interest income, a key aspect of profits, by $500 million. While the drop from the bank’s $58 billion projection last quarter to $57.5 billion now might not sound like much in the greater context of things, it does underscore the tough environment banks are operating in with interest rates under pressure, and some analysts said that’s why shares of JPM fell in pre-market trading despite a 16% rise in Q2 profits.
With JPM, investors often look to its influential Chairman and CEO Jamie Dimon for economic views. The bank’s conference call this morning is probably going to be well attended. Judging from the bank’s press release, Dimon feels optimistic, saying, “We continue to see positive momentum with the U.S. consumer, healthy confidence levels, solid job creation and rising wages.
He also cited the bank’s strong credit card business in the quarter as a sign of healthy consumer spending. However, home lending loans fell 7% for JPM during the quarter.
Goldman Sachs beat third-party consensus on earnings per share by nearly $1, but the stock only climbed slightly in pre-market trading. The company increased its dividend, which also might be helping the stock. Net revenues fell from a year earlier, primarily due to lower revenues in investment banking and investment management, the company said.
Seeing GS shares rise just a bit despite the earnings beat is another reminder of what we’re likely to see a lot of this quarter. Companies that beat might get rewarded just a little, while companies that miss could get punished severely.
The third big bank this morning, Wells Fargo (NYSE:WFC), also beat earnings and revenue expectations. However, net interest income missed Wall Street’s projections, another sign of the tough rate environment. The banks’ consumer business looked pretty strong in the quarter, with deposits and loans rising.
If there’s a single takeaway from the banks reporting today, that might be it—consumers still look healthy. However, it’s important to spend some more time listening to the calls and getting a full rundown from banking executives to get a fuller picture. It might also be important to get a sense from them on business spending, since many economists say the capital expenditure situation is slowing across the economy.
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Bank earnings dominate this morning, but there’s other stuff going on, too. In fact, strong June retail sales reported Tuesday by the government seem to provide more evidence beyond the banks’ earnings that consumers are still strong. The headline number rose 0.4%, compared with Wall Street’s 0.2% consensus. Things look even better if you strip out autos, gasoline and a few other items. So-called core retail sales without those things rose 0.7% in June.
Several Fed speakers are out there today, including Fed Chair Jerome Powell. He speaks at 1 p.m. ET, and the title is “Aspects of Monetary Policy in the Post-Crisis Era.” Judging from the title, it sounds unlikely that he’ll talk about current rate policy, but you never know.
In more earnings news, Johnson & Johnson (NYSE:JNJ) beat third-party consensus on both earnings and revenue, and also raised its revenue guidance for the year. The company’s quarter looked solid all the way through, and seeing JNJ increase guidance sends an important signal. Raising expectations is always a good thing.
Shares of JNJ rose just a touch in pre-market trading. The company’s conference call could be interesting because JNJ will be the first major Health Care sector company that has a chance to weigh in on recent changes in the Trump administration’s health policy plans.
h3 Where Next? Slow Trading On First Earnings Day/h3Stocks are wobbling a little as they stare over the precipice of full-blown earnings season. Stocks made very small gains Monday after spending most of the session trading both sides of unchanged. The Nasdaq (COMP) did a bit better than the other major indexes, but small-caps again came under pressure.
We jump into the reporting period with stock prices at record highs but with many analysts expecting earnings per share to fall year-over-year, meaning the “E” in the price-to-earnings (P/E) ratio doesn’t look like it’s keeping up its end of the bargain. Investors are likely re-evaluating what these earnings are actually going to look like and whether it justifies current prices. If earnings results don’t seem to correlate with current stock values, the price of stocks will likely need to change.
All that said, there are some positives. One is that this rally has been more widespread than last summer’s. Like then, Technology leads. But it’s not a one-hand clapping situation. If you look at the big gains, they’re spread pretty nicely across a bunch of sectors. A year ago, the FAANGs ran way ahead and everyone else seemed to be treading water.
With stocks at all-time highs, some investors might be feeling pretty good. Keeping things in context is important however. Although the SPX is up 20% year-to-date and Technology stocks are up 31%, the SPX is only up 8% year-over-year.
h3 Beyond The Banks/h3Focus on the big banks yesterday and today might push some other important earnings results to the back pages. However, investors might want to keep in mind that today’s batch includes key tidings from the Health Care sector with Johnson & Johnson (JNJ), while Communication Services arrives in the spotlight tomorrow with Netflix (NASDAQ:NFLX). And don’t forget Microsoft (NASDAQ:MSFT) on Thursday. It’s the biggest company in the stock market from a market-capitalization perspective and a member of the Dow Jones Industrial Average ($DJI), so its influence can be powerful.
Even with all the earnings concerns, volatility continues to be kind of a non-factor for the moment. The VIX stayed below 13 on Monday, traditionally a low level that doesn’t signal much fear ahead. It seems like with a U.S./China trade truce still holding, the fear factor isn’t a big issue. We’ll see if that changes, especially if any major company disappoints on the earnings front.
Keeping “fear” in mind for a moment, maybe that played a part in Financial shares falling Monday ahead of so many big banks reporting in the next few days. It also could have been a factor in Energy sector losses as crude fell more than 1%. Reports in the trade press about a possible “oil glut” by next year probably didn’t help the commodity on Monday, nor did China’s weakest quarterly growth in 27 years.
Figure 1: ENERGY LAG: The Energy sector (candlestick), which had been on the comeback trail after some desperate times a month or two ago, ran into trouble Monday as crude dropped sharply on supply worries and weak Chinese economic data. Meanwhile, Financials (purple line) also had been on the rise, but lost ground Monday ahead of a slew of big bank earnings. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Keeping Perspective on Potential Rate Cut: As we’ve said for a while, it’s a bit ironic that the stock market keeps making record highs in part on the prospect of rate cuts. A rate cut isn’t something that typically happens in a strong economy, so the very fact that the Fed seems ready to ease borrowing costs sends a possible warning signal. While a single “one-and-done” cut, which some analysts are calling an “insurance” cut, might not indicate any really major issues with the economy, a series of cuts might. As one analyst pointed out on CNBC Monday, the Fed’s past cycles of rate cuts typically coincided with longer periods of slow or even declining economic growth, and a so-called “soft landing” has been difficult to achieve, historically. The CME’s FedWatch tool currently puts chances of a 25-basis point rate cut at 72.4% later this month, and a 50-basis point cut at 27.6%.
Speaking of Which: Though few investors and analysts likely expected Fed Chairman Jerome Powell to push back against the odds of a July cut in his testimony to Congress last week, it’s still a bit surprising to see his testimony so weighted toward the negative. One part of his testimony that got special attention was when he said the strong June jobs report didn’t ease his worries. That suggests that the economy could be struggling even more than many investors had feared. With earnings moving into full speed this week, the focus now could turn toward whether corporate executives see some of the same concerns as Powell. Last quarter, many executives either left out or spoke only slightly about how tariffs were affecting their firms. This time around, the pressure could be on for them to speak out more about whether the trade battle with China is sinking its claws deeper into their operations.
Home on the Range Again? If it feels like a long time since the S&P 500 Index (SPX) was at 2500, it actually hasn’t been. We’ve come a very long way, very quickly, with the SPX plowing through 2500 for the most recent time back in January and never looking back on its way to a quick six-month run to 3000. A 500-point move in six months isn’t unheard of (remember we saw the SPX fall almost 600 points between last September and last December), but it’s unusual, and many analysts now think the market might have made most of the gains they expected for 2019 in the first half of the year. That could mean a bit of slow coasting for a while, if they’re right.
Powell gave the market some juice with his testimony last week, but at this point it’s hard to see stocks emerging from the range without some kind trade settlement with China. The closely watched U.S. 10-year Treasury yield, which also got some “juice” last week from core inflation numbers that rose a bit more than expected, also seems to be in a range, sinking to 2.09% on Monday from highs above 2.1% last week. It dipped below 2% a couple weeks back, but 2% might be a technical support level for now.
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