The banks are reporting earnings. And while they may seem boring, their insights into corporate and consumer behavior are anything but.
KEY TAKEAWAYS
MY HOT TAKES
On banking on. Do you think banks are boring? Big shiny buildings jam packed with soulless bankers looking to squeeze pennies out of your savings as they click their way through colossal-sized spreadsheets? Is that what you think? No cool weight loss drugs or shiny tech to reveal. No rocket ships, robots, or silly looking SUVs. Certainly, no leather jacket-clad, black t-shirt donning CEOs strutting across stages in front of 3-flight-high displays. Those companies have yet to deliver their earnings, but don’t worry they are coming. But until then…
Do you want to know an inside secret? Having the banks deliver earnings first is actually a really good thing. Because banks are in the business of money, and money fuels all industry… AND consumption. Therefore, banks are in a good position to give the rest of us a health check on not just consumers and companies, but also investors. It is not necessarily their performance that we should be interested in, but rather, we should be interested to hear what bankers are observing from their customers. This can be found in management commentary, and perhaps even more importantly, hidden in footnotes. It can also be found in earnings calls.
Through this morning, we have received earnings from 10 out 53 Banking and Financial Services companies on the S&P 500. So far, they have all surprised in EPS and revenue by 10.2% and 2.17% respectively on average. Markets have rewarded the beats by an average next-day trade in a gain of 1.1%. YOY earnings growth for the group came in around 8%, which is solid but well below last quarters’ growth numbers of 22%. Ok, with that basic stuff now out of the way, let’s see what we can learn from these companies about the state of the broader economy.
So, here is the skinny. You know all those great fees we were hoping for when President Trump was elected? Nope. There was a notable decline in advisory revenues as deals have been on hold as companies wait and see what is going to happen in this ever-changing trade environment. Morgan Stanley was cautiously optimistic on corporate climates while Goldman Sachs struck a more cautious and muted tone. Both saw significant increases in trade-based revenue due to market volatility.
On everyday consumers like you and me, the banks see consumption resilience despite the recent declines in consumer sentiment. Yes, folks, we are still buying stuff. However, the banks see the resilience may be split along income lines with lower-income clients struggling the most, relying more heavily on credit for purchases. Delinquencies are creeping up, but they haven’t exploded.
So, what is the bottom line? Well, based on careful observations of management commentary, using JP Morgan Chase and Wells Fargo as proxies for consumers, and Goldman Sachs and Morgan Stanley as proxies for corporations, it is clear that corporations are cautious while the consumer remains resilient for now. That fits neatly into the thesis that capital spending is likely to remain muted and decrease while employment may weaken. This scenario is likely to put pressure on the consumer and consumption. Ultimately, these will drive slower economic growth. This, of course, is dependent on the current lack of clarity on trade and tariffs.
This analysis was admittedly highly simplified, but I intended to show you the importance of earnings reports, and not just to see how companies themselves do, but to provide more data points for a bigger picture that may be completely outside the sector. I also wanted to remind you that bank earnings are not as boring as you might think. 😉 This morning we had earnings from Citigroup and Bank of America, while they both handily beat EPS and revenue projections, their earnings calls did not yet take place as I wrote this post (those will be at 11:00 AM and 8:30 AM Wall Street Time). I am eager to hear what those two think about consumer health, and I hope now, that so will you. Check out the following summary of this morning’s exercise; I think you will find it insightful. 👇
YESTERDAY’S MARKETS
Stocks gained yesterday after ambiguous news of a tariff reprieve for certain consumer electronics like smartphones and computers as well as semiconductors. Though there was conflicting messaging, the market decided to run with the positive narrative and turn around a mid-session swoon to close in the positive. The President also teased some sort of temporary relief for automakers. Ten-year Treasury Note yields eased after 5 straight days of gains.
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