Market Overview

Big Banks Deliver Mixed Results, But JP Morgan Stands Out With Strong Quarter

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Big banks stepped up to the plate Friday morning and took the first swings at Q2 earnings season. While JP Morgan (JPM) sent the ball soaring toward the fences, two other major banking firms appeared to have slightly less stellar at-bats and saw their shares slip in pre-market trading.

Overall, stocks had a slightly positive tone ahead of the opening bell after markets in Europe and Asia mostly rose overnight. The question is whether the rather mixed results from banks can help U.S. shares build on Thursday’s lofty gains as the S&P 500 (SPX) stares in the face of 2,800, a level it hasn’t breached since early February.

JP Morgan Delivers Healthy Quarter

Looking over the big bank numbers this morning, JPM really stood out with a particularly strong performance. The company earned $2.29 a share on revenue of $28.4 billion, easily beating third-party consensus analyst estimates for EPS of $2.22 and revenue of $27.36 billion. Profit rose 18 percent and trading division revenue rose 13 percent. Shares climbed 0.8 percent in premarket trading. 

In a press release, JPM painted a picture of economic and corporate health that sounded bullish across the board. “We see good global economic growth, particularly in the U.S., where consumer and business sentiment is high,” Chairman and CEO Jamie Dimon was quoted saying. “The healthy U.S. consumer drove double digit growth in client investment assets, card sales and merchant processing volumes. Capital markets were open and active, leading to strong fee and markets revenue performance.”

In other words, JP Morgan appeared to be firing on all cylinders during Q2 thanks in part to the robust U.S. economy, and likely also benefited from U.S. tax cuts. That could be a sign of positive things to come as other companies report earnings.

On a less enthusiastic note, however, Dimon said he acknowledges that “global competition is getting stronger."

Other Big Banks Report

Besides JPM, the other major banks reporting Friday morning were Citigroup Inc. (NYSE: C) and Wells Fargo & Co. (NYSE: WFC). Citigroup delivered earnings per share of $1.63, easily beating Wall Street analysts’ expectations for $1.56. Revenue of $18.469 billion was close to analysts’ estimates of $18.46 billion, but might have disappointed some investors, because the stock was down slightly in pre-market trading. The company appeared to struggle with its fixed income trading, where revenue fell 6 percent in what it called “a more challenging market environment” and with a tough comparison to the year-ago figure, C said in a press release. Corporate lending also came in a bit weaker than some analysts had expected.

WFC, which has been struggling with its own internal issues for some time, saw shares fall more than 2 percent in pre-market trading after reporting revenue of $21.55 billion, missing the third-party consensus estimate of $21.68 billion. The company’s 98 cents earnings per share also fell short of consensus estimates of $1.12.

Entering bank earnings season, the financial sector had been lagging the SPX’s better than 4 percent return so far in 2018. The major story weighing on the big banks has been the flattening yield curve, so it’s likely CEOs will discuss the current interest rate environment and how it could impact their businesses, a topic that’s come up regularly on earnings calls in recent quarters. 

In other corporate news, the Justice Department said it plans to appeal a federal judge’s ruling in June that gave the go-ahead to AT&T Inc.’s (T) $85.4 billion acquisition of Time Warner (TWX). The government has said it thinks the deal is anti-competitive. We’ll have to wait and see how that one turns out. 

Comeback Kid

Thursday’s comeback rally put the Dow Jones Industrial Average ($DJI) back into positive territory for the year, sent the Nasdaq (COMP) to a new all-time high, and lifted the S&P 500 (SPX) back to highs last seen in early February before that month’s 10 percent correction knocked indices off their perch. Info tech helped lead the way Thursday with a nearly 2 percent daily rise, but industrials and health care weren’t too far behind.  

It’s hard to put a finger on exactly why the market revived so enthusiastically Thursday after Wednesday’s wash-out. It could have partly reflected continued optimism around earnings, or it might have been partially the impact of more positive news coming out of the NATO meeting after Wednesday’s rocky start to the gathering. Overseas market strength might also have helped, as the beaten-down Shanghai composite charged 2 percent higher Thursday.

There might have also been some relief after crude oil prices fell 5 percent Wednesday. That was just one day, of course, and reflected Libyan supplies coming back to the market. However, if crude does start descending, it could potentially loosen some of the pressure on companies and consumers struggling with higher energy costs.

Don’t Forget Trade Issues, Technical Picture

Fed Chair Jerome Powell weighed in on tariffs Thursday in an interview published in Marketplace, saying the economy is “in a good place” but that any sustained high tariffs could be have a negative impact.

On a technical basis, the SPX sits on the edge of 2,800, a mark it last closed above nearly six months ago.  The market appears to be testing a resistance band between 2,789 and 2,802, and would need to close above this range to re-establish a bullish bias, according to research firm CFRA.

Meanwhile, volatility is sliding ahead of earnings season. The CBOE’s VIX fell more than 7 percent Thursday to below 13 as the market rallied. Sometimes the periods between earnings seasons can be more volatile than in the thick of earnings, simply because the day-to-day news flow is less predictable. However, we might not be out of the woods yet as far as volatility is concerned, because the trade fears that reared their heads Wednesday haven’t gone away.

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FIGURE 1: Rough Riders: Transport stocks (candlestick) have had trouble staying out of the ditch lately despite a booming economy. Often, economic growth goes hand in hand with transport strength as these companies get tasked with pulling more cargo and taking on more passengers. One possible impediment for the sector might be high oil prices. Earnings reports coming up from some of the key players might shed more light. 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. Chart Source: The thinkorswim platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results. 

 

Curve Narrowing

Amid the bullish action, some analysts pointed to one cautionary note in the market Thursday. It didn’t come from stocks, but from the interest rate complex. Once again, the gap between 10-year and 2-year Treasury yields fell. It’s now at 25 basis points, the lowest in more than 10 years. As we discussed yesterday, this is sometimes seen as a potential warning sign of slower economic growth. It also tends to be tough on the financial sector, which was one of the worst-performing stock sectors of the day Thursday going into today’s bank earnings. 

Looking Behind the Inflation Headlines

Don’t let what looks like benign consumer price data fool you; inflation isn’t necessarily out of the picture. Yes, it’s true that the June Consumer Price Index grew just 0.1 percent, which was below Wall Street analysts’ expectations. However, producer prices rose above expectations at 0.3 percent, and year-over-year consumer prices rose 2.9 percent, the biggest since February 2012. The 2.9 percent did include a spike in energy prices, and core prices rose a more mild 2.3 percent. Still, when producer prices grow faster than consumer prices, it sometimes means consumers might have to pay more down the road. Though companies can hold off passing along higher prices to consumers for a while, they can’t always do that for the long term. Those higher producer prices could eventually filter down to customers, and the overall inflation picture doesn’t seem to give the Fed any reason to step back from its current hiking mode.

Listen for Tariff Talk

One thing to listen for on this quarter’s earnings conference calls is any feedback executives might have about how tariffs might affect their business. We heard some of this back in Q1, but the tariff picture seems a little clearer now and it could be interesting to get a sense of how or whether tariffs might affect company guidance for the coming quarters. In some respects, tariffs could have a similar impact on multinational companies as the strong dollar did a couple of years ago, applying a slight brake to foreign sales and perhaps pressure on earnings. Companies to consider watching closely that could be “canaries in the coal mine,” so to speak, include the big agricultural companies like Caterpillar Inc. (NYSE: CAT) and Deere & Co. (NYSE: DE), as well as other companies with heavy foreign sales such as Apple, Inc. (NASDAQ: AAPL) and Boeing  Co. (NYSE: BA).

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Posted-In: TD AmeritradeEarnings News Commodities Markets

 

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