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Market Overview

Takeaway From Big Bank Earnings? Consumers Looking Healthier As Loans Grow


Big bank earnings dominate the proceedings today, and what we saw looked pretty good as results pointed to a healthy consumer. Credit card divisions and business loans sent positive signals, even as trading revenue came in a little light.

JPMorgan Chase & Co. (NYSE: JPM), Wells Fargo & Co (NYSE: WFC) and Citigroup Inc (NYSE: C) reported Q2 results before the open, and all easily beat analysts’ consensus bottom-line expectations. Arguably, JPM posted the strongest results, with earnings per share of $1.82 way above consensus of $1.58, and revenue of $26.41 billion topping consensus of $24.96 billion.

Citigroup reported EPS of $1.28, compared with estimates for $1.21, and revenue of $17.9 billion topped estimates for $17.32 billion. WFC’s EPS of $1.07 came in above estimates for $1.01 per share, and revenue of $22.17 billion was a little light compared with estimates for $22.47 billion.

While the big banks benefited from rising interest rates and in some cases better commercial lending, trading was a sore spot, especially for C and JPM. The banks said lower volatility in the markets hurt trading volume, with fixed income trading hitting C in particular. That didn’t really come as a surprise, because bank executives had already given some warnings about the trading environment, and anyone who’s watched the markets over the last three months is probably well aware of the lack of volatility.

What really stood out is that all the results showed the consumer being healthy, which is a good sign. Credit card divisions generated more revenue than expected, and business loans also came in strong. Mortgage activity slowed down a little, which probably affected WFC more than the others, but that might have been cyclical.

Remember to pay close attention to what bank CEOs say on their earnings calls, which should be available on company web sites if you missed the live broadcasts this morning. Last quarter, we heard some bank CEOs say great things about the market. The question is whether they still feel the same way three months later. Also, last year many bank CEOS were saying they felt they could beat expectations in the environment that prevailed at the time. A more positive takeaway this quarter would be hearing them say they think they can grow. It could also be enlightening to hear them discuss macroeconomic factors impacting markets across the world. 

Thursday delivered another record-setting day for the stock market, with nine of 11 sectors rising and the Dow Jones Industrial Average ($DJI) closing at another new record high. The S&P 500 Index (SPX) also isn’t far from an all-time record and is up 1% this week.

The fact that the stock market is at or near record highs could have an impact on earnings-related trading in the weeks to come. Companies that miss earnings projections or that meet projections but give a bad outlook could get punished by the market, in part because we’re so close to all-time highs, so it takes more good news to push things higher. Bad news is more likely to send a stock lower

Today is a summer Friday, and more earnings are ahead. We may see people start taking some risk off the table, watching what happens over the next two weeks with earnings, and re-assessing sectors.

The list of top-performing stocks on Thursday looked like a walk down Main Street, with Gap Inc (NYSE: GPS), Target Corporation (NYSE: TGT), Wal-Mart Stores Inc (NYSE: WMT), Home Depot Inc (HD), Dollar Tree, Inc. (NASDAQ: DLTR), and Macy’s Inc (NYSE: M) all posting big gains. The spark came from TGT, which raised its estimate for Q2 same-store sales, putting some optimism back into a retail sector that’s sagged this year amid online competition.

However, retail sales for June dropped 0.2%, the government reported Friday morning, compared with Wall Street consensus expectations for a 0.1% climb. Additionally, the June Consumer Price Index was flat, vs. a 0.2% expected rise.

Fed Chair Janet Yellen once again testified to Congress Thursday, but there were few new revelations following her first appearance on Wednesday.


FIGURE 1: NEW HIGHS FOR DJIA. The Dow Jones Industrial Average ($DJI) plotted through Thursday on the thinkorswim® platform from TD Ameritrade, set another record high Thursday, and the S&P 500 (purple line) also climbed to near its record. The Nasdaq (blue line), remains below all-time highs recorded last month but is still well ahead of the other two indices in year-to-date performance. Sources: Standard & Poor’s, Nasdaq, Dow Jones & Co. For illustrative purposes only. Past performance does not guarantee future results.

Initial EPS Estimate Not Final Word

Many Wall Street analysts expect S&P 500 earnings per share growth for Q2 to be in the neighborhood of 6%. That’s down quite a bit from the dramatic 15.5% EPS growth in Q1, but it’s also not necessarily going to be accurate, as anyone who’s watched recent earnings seasons may have noticed. For instance, going into Q1 earnings, the average analyst EPS growth estimate was 9.9%, according to research firm CFRA. That means actual EPS outpaced first estimates by 5.6 percentage points. History doesn’t foretell the future, but there have been other quarters recently in which Wall Street also under-estimated EPS growth, so we’ll keep tabs on the actual number as earnings season continues. Stronger than expected EPS growth could potentially reduce the S&P 500 Index’s (SPX) price-to-earnings (P/E) — which remains above the historic mean at about 18 times forward earnings — conceivably making stock prices look a bit cheaper.

Info Tech Extends its Lead

A couple weeks ago, it looked like health care might catch up with info tech as the best-performing sector of 2017, but now info tech appears to be on its game again. As of mid-week, info tech shares were up 1.7% in July and 18.4% year to date, outpacing health care’s 14.6% year-to-date performance. Health care actually fell in 2016, but strength in biotech, the possibility of health reform, and some exciting new products helped bring the sector back this year. The health sector’s traditional strength in dividends might also be playing into the rally, as bond yields remain low and aren’t competing as much with stock dividends as some analysts had thought going into the year.

No Rain Dance in Corn Market

Corn futures, which had been roaring higher earlier this week, took a dive Thursday after heavy rains soaked parts of the Midwest, including the Chicago area. Before that, concerns about possible dryness affecting crop quality had corn futures rising toward the $4 a bushel level, a mark the front-month contract hasn’t reached in over a year. Some of the big U.S. agricultural conglomerates can see their fortunes affected by crop prices, so grain futures are worth monitoring, especially here in the heart of the U.S. growing season.


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