Not Pretty: Bank Earnings Mostly Look Weak Compared to A Year Ago, But Bad News Baked In

(Friday Market Open) With bank earnings, a major merger announcement, and retail sales, investors have their hands full this morning following yesterday’s remarkable comeback from sharp losses. Overall, there’s a slightly positive tone on Wall Street early; bank earnings looked weak, but the market has likely already priced that in.

Treasury yields looked like an early tailwind for the market Friday. They were down across the board, with the benchmark 10-year Treasury yield (TNX) falling below 3.9% after hitting 4% earlier this week.

Potential Market Movers

Before the bell Friday, JPMorgan Chase JPMMorgan Stanley MSWells Fargo WFC, and Citigroup C all reported results. Their narrative is likely to set the tone for the rest of Q3 earnings season.

If tone-setting was just based on JPM’s results, there’d be plenty of positive vibes. The bank beat Wall Street’s earnings and revenue estimates, with revenue up 10% and bolstered by gains in net interest income amid rising interest rates.

However, that profit was down 17% from a year ago as investment banking took a hit, underlining the tough environment investment banking faces now with initial public offerings (IPOs) few and far between. JPM also set aside another $800 million to protect against possible loan losses (a year ago it had been reducing those reserves).

JPM’s stocks trading revenue fell year over year, but fixed income trading rose. It was also good to see JPM’s consumer and loan businesses trend positively during the quarter, and shares rose more than 5% ahead of the opening bell.

JPM CEO Jamie Dimon will speak on the company’s earnings call, and his words can sometimes move the markets. But he took some of today’s spark away by talking earlier this week on CNBC, offering gloomy forecasts about possible stock market weakness and chances of a recession. Today, in the company’s press release, he talked about “headwinds immediately in front of us” and said the company is “prepared for bad outcomes.”

The outcomes were indeed worse than expected at rival bank MS, which missed analysts’ quarterly estimates for both earnings and revenue after a tough quarter for investment banking. Revenue fell 55% in that MS division.

WFC, on the other hand, also enjoyed a net-interest income boost but took a $2 billion charge related to its long-running legal and regulatory issues. Shares still rose 2% in the early going. WFC missed analysts’ earnings estimates but outperformed on the top line. Earnings were down 31% from a year ago, another sign of the tough current environment.

It’s also a tough environment for C, which did beat analysts’ estimates on revenue and earnings per share. However, its loans were down from a year ago and overall profit fell 25%. Like other banks, C set aside more funds for potential loan losses.

Beyond Banks

There’s plenty of other news competing with banks this morning, including the reported firing of the U.K. finance minister (which appeared to unnerve the market) and Kroger (KR) agreeing to acquire rival grocery chain Albertson’s (ACI) for $24.6 billion. Expect the U.S. government to take a close look at the proposed KR/ACI merger for possible antitrust. Combining these two grocery behemoths could mean one or both companies may be required to shed stores to make sure a merger doesn’t lead to market saturation.

There’s also some fresh data to watch, including retail sales. They were unchanged in September following a revised 0.4% rise in August. Analysts had expected a 0.2% gain, according to Briefing.com. With cars stripped out, retail sales rose 0.1%. Slowing retail sales might be viewed as bullish from an inflationary perspective. The data also showed a drop in import prices, which could help inflation come down.

Bank earnings continue Monday with Bank of America (BAC) expected to report. Like JPM, BAC is closely tied to the consumer economy, so its quarterly results and outlook could provide more details about how consumers are dealing with high inflation and interest rates. 

Otherwise, Monday might offer a bit of a breather after a packed week. There’s no major data due Monday, and the earnings calendar is pretty quiet. That’ll give everyone a chance to stretch ahead of Tuesday’s expected earnings from Goldman Sachs (GS), Johnson & Johnson (JNJ), Lockheed Martin (LMT), and Netflix (NFLX). Things are just getting started.

About Thursday…

You can point to a number of possible reasons for yesterday’s whipsaw move from an early 500-point drop in the Dow Jones Industrial Average® ($DJI) to its 800-point closing gains, a dramatic 1,300-point swing in one session.

Some said it was short-covering. Or the market might have responded to a reversal in the 10-year Treasury yield (TNX) and the U.S. Dollar Index ($DXY). Both of those key indicators eased slightly Thursday from morning peaks but remained close to recent highs.

Others pointed to overseas influence. The recent sharp drop in U.K. bond yields might’ve eased fears of financial instability fears haunting that economy. Also, a Kremlin spokesperson’s comments to a Russian newspaper hinting at openness to negotiations in the Ukraine war—reported by Reuters midday Thursday—might have driven some market optimism. Additionally, more than 900 stocks carved new 52-week lows yesterday. New lows are sometimes a contrarian indicator, convincing some investors to hunt for bargains.

Also, don’t rule out the chance that the rally might have been triggered by the Cboe Volatility Index’s®(VIX) failure to rise despite market losses (see chart below). When the $DJI fell 500 points right after the government reported its hot September Consumer Price Index (CPI) data, the VIX didn’t jump at all. On the contrary, it dropped slightly. That was a sign something might be amiss, because volatility usually increases when stocks stumble. Yesterday was a lesson for investors: When in doubt, check the VIX. If it doesn’t agree with the major stock indexes, perhaps it’s telling you something.

VIX ended Thursday just below 32, which is still elevated compared to the historic average of around 20. At current levels, the VIX indicates that major indexes could move around 2% in either direction on any given day. Of course, a 1,300 point one-day move in the $DJI isn’t something seen often, but that kind of choppiness is a little less surprising with VIX this high. That’s why anyone trading these markets needs to use extra caution and perhaps keep trade sizes lower than normal.

Whatever caused the rally (and it’s almost never just one thing), it was the first positive day for major indexes in more than a week and a welcome relief for battle-hardened investors. From a technical perspective, it might have been constructive that the S&P 500® (SPX) closed just above 3,666, the lowest daily settlement during the June pullback. The close above that level might set a technical support base. We had a roughly 15% rally off that spot a few months ago.

Also from a technical standpoint, 4% appears to remain a barrier for the TNX, which rose above it for a short time yesterday before closing under that level.

Reviewing the Market Minutes

The light turned bright green for major indexes yesterday after they put on the brakes early.

The SPX climbed 2.60% to 3,669.91, breaking a six-day losing streak. The Dow Jones Industrial Average® ($DJI) rose 827.87 points, or 2.83%, to close at 30,038.72. Before the big turnaround yesterday, the SPX sank below 3,500 to its lowest level since early November 2020.

The Nasdaq-100® (NDX) rose 2.3% and the Russell 2000® (RUT) climbed 2.4%.

Consumer discretionary stocks such as Amazon AMZNHome Depot HDLowe’s LOW, and internet shopping companies all took an initial blow Thursday from the worse-than-expected CPI data. The worry is that consumers might pull back on holiday shopping due to climbing prices. HD managed to finish with small gains yesterday, but AMZN and LOW didn’t join the market’s party.

If Friday night is pizza night at your house, Domino’s DPZ shares might have been a tasty stock yesterday, rising sharply after the company reported strong quarterly revenue. The company said higher prices lifted its U.S. sales, though international sales growth got hit due partly to the firm dollar. This could be a preview of dollar strength dragging overseas earnings across the market in Q3.

Food and beverage stocks continue to report decent results early this earnings season, backing up claims by some executives (including at airlines) that consumers are spending more on experiences instead of objects. This could be good news for other “experience” companies like theme parks, casinos, hotels, and other companies as earnings season continues, but we’ll have to wait and see.

CHART OF THE DAY:  Pain Factored In: Banks had a tough quarter overall, despite some of them beating analysts’ earnings and revenue estimates. However, the sector has been beaten down a lot already, as this one-year chart of KBW Bank Index (BKX—candlestick) makes clear. Data Source: Nasdaq. Chart source: The thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Your Favorite COLA? On Thursday, the Social Security Administration (SSA) released its much-awaited annual cost-of-living (COLA) adjustment figure for retirement benefits. And like inflation itself, it’s now at a 40-year-high—8.7%. Earlier this summer, some experts thought SSA’s 2023 COLA adjustment would be significantly higher, somewhere around 10-11%. So, what happened? Blame gasoline prices, which hit summer highs and then started to slip, at least until the end of Q3. A Medicare policy analyst from the Senior Citizens League—the organization that correctly predicted yesterday’s COLA number—told Barron’s that the recent gas price slide was reflected in the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, SSA’s metric of choice in setting the COLA number. Notably, between October 1-10, the U.S. average price of gas was up 20.55 cents a gallon after 17 straight weeks of decline, according to the Lundberg Survey. 

Chips and China: Semiconductor shares, among the most downtrodden subsectors of the market lately, got a lift yesterday from a strong Taiwan Semiconductor TSM earnings report. TSM did say it’s cautious going into 2023 as global demand sags, and plans to cut capital spending. The entire chip sector came under pressure this week amid concerns about new rules from the U.S. Commerce Department on exporting chips and related equipment to China. Several chip and chip-related stocks, including Lam Research LRCX, TSM, and Applied Materials AMAT plunged earlier this week after the Biden administration announced the stricter rules. The Philadelphia Semiconductor Index SOX fell 9% in two days. Friday was a respite, but the industry situation still seems gloomy and could be a high-level source of pressure on this influential industry.

Beware of a Head-Fake: Trying to time the market is one of the worst mistakes an investor can make. First, it’s impossible to know exactly when the market has bottomed or topped. Second, it’s expensive to go in and out of stocks trying to take profit or buy low. You’re also liable to miss big moves to the upside if they happen when you’re not invested. But trying to time things appears to be the mistake many investors made earlier this year and it might be about to happen again.

During Q2 earnings season over the summer, the SPX rallied 17% amid widespread belief that earnings and data would improve. Both ideas were wrong. Earnings expectations for Q3 have cratered since then, and persistent inflation forced the Fed into more rate hikes. Now the SPX just had a huge turnaround day to rally off of two-year lows as Q3 earnings season began, and, once again, investors could hear happy talk from corporations about the future despite what analysts expect will be poor Q3 results. Thursday’s whipsaw rally might reflect optimism about a bottom being in, but there’s no way to be sure. This doesn’t mean you can’t buy shares of good companies (which you’re probably already doing automatically through your retirement plan). Just be wary of an autumn head fake after the one we had last summer. With the Fed firmly committed to rate hikes, it’s not necessarily a good time to go “all in” on expectations of a big turnaround.

Notable Calendar Items

Oct. 17: October Empire State Manufacturing and earnings from Bank of America (BAC)

Oct. 18: September Industrial Production, September Capacity Utilization, and earnings from Goldman Sachs (GS), Johnson & Johnson (JNJ), Lockheed Martin (LMT), United Airlines (UAL), and Netflix (NFLX)

Oct. 19: September Housing Starts and Building Permits and earnings from Abbott Labs (ABT), Procter & Gamble (PG), Biogen (BIIB), Travelers (TRV), Tesla (TSLA), and Las Vegas Sands (LVS)

Oct. 20: September Existing Home Sales, Philadelphia Fed Index, and earnings from Alaska Air (ALK), American Airlines (AAL), AT&T (T), Dow (DOW), Whirlpool (WHR), and CSX (CSX)

Oct. 21: Earnings from American Express (AXP), Schlumberger (SLB), Nokia (NOK), Blackstone (BK), and Verizon (VZ)

Oct. 24: Earnings from Royal Philips (PHG) and Northwest Bancshares (NWBI)

Oct. 25: October Consumer Confidence, and earnings from Archer-Daniels (ADM), Biogen (BIIB), General Electric (GE), General Motors (GM), Microsoft (MSFT), Texas Instruments (TXN), and Visa (V)

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Posted In: TD AmeritradeEarningsNews