By the time the market opens this morning, we will have seen Q1 earnings from five of the big six U.S. banks, with only the largest of them in terms of market cap, Bank of America (BAC) still to come. BAC will report on Monday but there is already a clear pattern emerging from what we have heard to this point, and it isn’t really an encouraging one.
On the surface, all the results so far seem positive to some degree. JP Morgan Chase (JPM) yesterday, along with Wells Fargo (WFC), Morgan Stanley (MS), Goldman Sachs (GS), and Citi (C) this morning have all beaten estimates for earnings per share (EPS). The early market reactions have been mixed, with JPM and WFC dropping after revenue misses, and the other three all reacting positively initially.
In part, the positive reactions are probably because stocks tend to pop on a headline beat of EPS no matter what. But as traders and investors look a bit deeper, it isn’t all good news. For starters, the estimates that they have beaten were, in all cases, significantly lower than their results for the same quarter last year, and they have all reported a big year on year drop in earnings. That was expected and inevitable, partly due to losses related to the Russian invasion of Ukraine and subsequent sanctions, but more worrying in some ways is the underlying structure of their profits.
As is so often the case, trading revenues accounted for a big part of those earnings. That is proof that volatility is a trader’s friend, no matter the overall direction of the market, and that the big banks, with their advantages in information flow and speed of execution of trades, are ideally placed to benefit from that. Despite that, though, trading profits are not really predictable or necessarily repeatable. Those predictable areas are things like consumer banking, lending, and investment banking, and they didn’t do as well.
For anyone other than shareholders in the big banks, that is what matters. Those are the parts of their business that relate directly to economic conditions, so relative weakness there is a concern for any investor. If consumer activity, borrowing, and IPOs are wobbling, it is basically a warning sign for what the next few months will bring. It will be interesting to see if the earnings conference calls that follow the releases focus on those issues and, if they do, how bank stocks react. It wouldn’t surprise me at all if the gainers gave back at least some of their gains as the day wears on.
The generally disappointing revenue from lending and investment banking are the most worrying parts of this. It indicates that even before the Fed really gets its teeth into rate hikes, corporate America is feeling hesitant about the future. Confident companies are happy to borrow to invest in growth, especially if they know interest rates are about to go up, and they don’t hesitate to go public. However, they are much more reluctant to do either of those things when there is uncertainty about the future.
So far, bank earnings have been what is usually described as “mixed,” creating the impression that they are more about the performance of individual companies than any overarching theme for the industry. However, as we enter a period where the Fed is indicating a rapid increase in interest rates, there are signs within these earnings reports that corporations are feeling less than optimistic about the immediate future, and that should sound a note of caution for all stock investors.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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