Bank Of America And Goldman Sachs Split On Earnings Reports, Possibly Putting Bank Rally In Jeopardy

(Monday Market Open) Investors around the globe appear to be starting the new trading week with a positive attitude as Asian and European markets traded higher overnight helping to boost U.S. equity index futures.

Potential Market Movers

Japan’s Nikkei, Hong Kong’s Hang Seng, and the Shanghai Composite respectively closed 0.54%, 2.7%, and 1.55% higher. The Stoxx Europe 600 was 1.41% higher before the U.S. markets opened, reflecting rallies in London’s FTSE 100 (1.23%), Germany’s DAX (1.43%), and France’s CAC 40 (1.49%).

The positivity appears to be contagious as the Dow, S&P 500, and Nasdaq futures were up 0.84%, 0.78%, and 0.96% in premarket trading.

The global markets were getting some help from a two-day slide in the U.S. dollar. The U.S. Dollar Index ($DXY) was down 0.55% before the market open.

However, it may not be a “risk on” day just yet. The Cboe Market Volatility Index (VIX) was trading a bit higher, climbing more than 3% to 25. Additionally, the 10-year Treasury yield (TNX) was six basis points higher to 2.99% early Monday.

Earnings from the financial sector continue to be mixed as Bank of America BAC missed on revenue and earnings estimates, but Goldman Sachs GS blew their top- and bottom-line numbers out of the water. BAC was down 0.68% in premarket trading due to that miss prompted in part by its weak capital markets business. The bank didn’t provide future guidance with the report but will likely offer some during its conference call.

Meanwhile, Goldman rallied 3.77% in premarket action after reporting earnings of $7.73 per share, exceeding the FactSet analysts’ estimate of $6.56. While earnings were still down 47% from the previous quarter and the company’s capital markets business also struggled, GS saw revenue increases in its consumer and wealth management businesses grow 25% while compensation costs fell 30%.

Investors holding Alphabet GOOGL will want to remember that today is the day it starts trading at its new split price. The 20-for-1 stock split could be a bit of a scare if it were to sneak up on an investor.  

WTI crude oil futures were trading 2.2% higher before the opening bell. President Biden was in in Saudi Arabia encouraging the government to increase oil output to help reduce prices at the pump. However, Saudi Arabia failed to offer any concrete commitment for increased production.  

Today marks the start of the Fed’s blackout period where Federal Reserve members will stay out of the media’s eye. Looking at the calendar, there also don’t appear to be any major economic reports scheduled for this period. That’s a contrast to June when the worse-than-expected Consumer Price Index (CPI) and the Michigan Consumer Sentiment report numbers were released during the blackout and the Fed couldn’t respond.

Last week’s CPI and Producer Price Index (PPI) came in much hotter-than-expected causing the market to discount a 100-basis point hike by the Fed later this month. However, investor sentiment seemed to change after Friday’s better-than-expected retail sales report and more subdued consumer inflation expectations from the Michigan Consumer Sentiment report.

The CME FedWatch Tool is now reflecting a 75-basis-point hike. 

Reviewing the Market Minutes

Stocks ended a five-session losing streak on Friday with financial stocks leading a sector turnaround as well as the market.

Big earnings misses Thursday by JPMorgan Chase JPM and Morgan Stanley MS seemed all but forgotten by week’s end, because the PHLX KBW Bank Index (BKX) finished up 5.67% and the Financials Select Sector Index posted a 3.40% gain after losses the previous day. Behind financials, health care and communications services rounded out the top three sectors of the day.

Among the major indexes, the Dow Jones Industrials ($DJI) gained 658.09, or 2.15%, on the day, the S&P 500® index (SPX) advanced 1.92% to finish at 3,863.15, and the Nasdaq ($COMP) gained 1.79%, or 201.24, to finish the week. The Russell 2000 finished up 2.16% to close at 1,744.37.

By Friday’s close, the Cboe Market Volatility Index (VIX) settled slightly above 24.

As to how the kickoff of Q2 earnings season has gone so far for the few companies in the S&P 500 index (SPX) that have reported, FactSet said Friday that the 7% of the reporting companies offered “weaker-than-normal” results, adding that the number and magnitude of positive earnings and revenue surprises were “smaller than average.” Among these early reports, the research firm said 60% had reported actual earnings per share (EPS) above estimates but still below the five-year average of 77%. Overall, FactSet said companies are reporting earnings that are 2.0% above estimates, below the five-year average of 8.8%.

After a volatile week in which Federal Reserve watchers raised expectations for a 100-basis-point hike at the central bank’s next meeting, two high-profile reports seemed to calm the waters.

Before the trading day, U.S. retail sales for June rose 1% on a monthly basis and ahead of estimates, indicating consumers are still opening their wallets despite 40-year-high inflation. After the open, the University of Michigan reported that preliminary July data for its consumer sentiment index edged up to 51.1 from 50.0 in June.

That slight upward bump—combined with better retail sales numbers—sent several major retailers higher. By Friday’s close, Home Depot HD finished up 1.01%, Target TGT gained 0.27%, Walmart WMT advanced 0.99%, and Amazon AMZN added 2.64%.

As mentioned, banks seemed to recover their footing on Friday. After reporting second-quarter earnings results early Friday, Citigroup C advanced 13.23% and Wells Fargo WFC finished up 6.25% by the close. Even JPMorgan Chase JPM and Morgan Stanley MS, which kicked off the bad Q2 earnings news for the banks on Thursday, finished up 4.58% and 4.50% respectively by the closing bell.

Among other financials sector leaders reporting earnings on Friday:

• U.S. Bancorp USB reported a miss with earnings per share (EPS) of $0.99 but revenues above expectations to $6.01 billion. The stock finished up 5.34%.
• PNC Financial PNC beat on earnings at $3.39 EPS but with below-estimates revenue of $5.12 billion. PNC finished with a gain of 1.63%.
• BlackRock BLK, the world’s largest asset manager, reported a 30% drop in second-quarter profits but still gained 2.05% by the close.

Bank of America BAC rose 7.04%, and Goldman Sachs GS gained 4.36% Friday ahead of their earnings announcements today.

The 10-year Treasury finished at a yield of 2.93%, flat for the session, while WTI crude oil gained 1.89% to finish at $97.60 per barrel. 

CHART OF THE DAY: SO, HOW’S MORALE? As the Federal Reserve goes day-to-day in its search for signs that inflation could be slowing, consumer expectations about future inflation have been a key barometer in recent rate decisions. On Friday, there was a bit of good news about that. On top of better U.S. retail sales numbers, the University of Michigan’s preliminary consumer sentiment numbers for July showed that inflation expectations have “held steady or improved” based on numbers so far. (This graph doesn’t include today’s data.) FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. The Federal Reserve Bank of St. Louis does not sponsor or endorse and is not affiliated with TD Ameritrade. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

BIT BY BIT: Friday’s data indicates that the Fed is making progress in its efforts to cool red-hot inflation, but are things cooling down with consumers? Not likely. Though the early July numbers for University of Michigan consumer sentiment stayed “relatively unchanged,” researchers indicated that “current assessments of personal finances continued to deteriorate,” reaching their lowest point since 2011.

And though inflation expectations are steady for the moment, the report said the share of consumers “blaming inflation for eroding their living standards continued its rise to 49%,” matching the all-time high reached during the Great Recession. The university added that these views continued despite the most recent national gas price drop to $4.58 per gallon, according to AAA.

TOO (BLANK) HIGH: The New York rental market is the nation’s largest, and in case you missed it, one of the priciest. According to a report last week from real estate companies Miller Samuel and Douglas Elliman, the average monthly Manhattan apartment rent in June was $5,058. The firms said average rental prices were up 29% over last year, while median rent was $4,050 per month, up 25% year-to- year (YOY).

For those of you tempted to say, “Oh, that’s just New York,” the latest Consumer Price Index (CPI) numbers showed that the nation’s residential rents were up 0.8% month-to-month and 5.8% YOY.

SCHOOL DAYS: Back-to-school shopping used to be about pens, pencils and a few new outfits bought close to the first day of school. Today, it’s starting earlier than ever and now stands as the second-most important retail selling season after the December holidays. As inflation mounts and education trends evolve, this year’s back-to-school selling season may be one investors want to watch.

Deloitte reports that back-to-school market size is expected to be $34.4 billion in 2022, up 5.8% YOY. And even though parents report they’re struggling financially, they will spend an inflation-driven $661 per child in the coming weeks versus $612 in 2021. However, Deloitte found that 8% of parents are currently homeschooling their kids (versus 4% in 2021), and homeschoolers are likely to spend 15% less than the average back-to-school shopper.

For college kids, parents are spending $1,600 per child, up 10% YOY, with digital technology becoming an even bigger driver of market growth as students increasingly attend class from anywhere.

Notable Calendar Items

July 19: Building permits, Housing starts, and earnings from Johnson & Johnson JNJ, Lockheed Martin LMT, Netflix NFLX, Haliburton HAL, JB Hunt JBHT, and Hasbro HAS

July 20: Existing home sales and earnings from Tesla TSLA, Abbott Labs ABT, Kinder Morgan KMI, Biogen BIIB, and Baker Hughes BKR

July 21: Philadelphia Fed Manufacturing Index and earnings from AT&T T, Philip Morris PM, Union Pacific UNP, Intuitive Surgical ISRG, and Freeport-McMoRan FCX

July 22: Earnings from Verizon VZ, American Express AXP, Schlumberger SLB, and Twitter TWTR

July 25: Earnings from Alphabet GOOGL, NXP Semiconductors NXPI, and Whirlpool WHR

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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