Sometimes earnings throw investors a curveball. Not today. The first wave of Q1 big bank results looked pretty much as strong as most analysts had expected. Even stronger, actually.
Strength in results doesn’t always translate into stock market gains, however. JP Morgan Chase (NYSE:JPM) actually dipped in pre-market trading, but Goldman Sachs (NYSE:GS) shares plowed higher. Actually, the entire market appears to be getting an early lift from the results after being mixed earlier in the overnight session.
Besides bank earnings, things to watch today include expected comments from Fed Chairman Jerome Powell, who’s scheduled to talk at noon about the global economy at the Economic Club of Washington. Also, Fed Vice Chairman Richard Clarida speaks this afternoon.
Big Bank Bonanza
Looking more closely at JPM, a couple of things stand out. The company easily beat analysts’ consensus earnings estimate with a profit of $4.50 a share vs. the $3.08 expected, while revenue of $33.12 billion exceeded consensus by more than $2.5 billion. Fixed income trading was pretty good in Q1 for JPM, but equities trading revenue exploded by 47%, just obliterating the Street’s estimates.
JPM also released more than $5 billion in reserves it had set aside for possible credit losses during the pandemic, and a lot of this flowed straight to the bottom line. This says something that goes way beyond JPM itself, mainly that the economy came out of the pandemic better than the big banks had expected, with less bad debt developing.
GS was pretty much the same story in Q1, dominated by an investment banking and trading juggernaut. The company’s $18.60 a share earnings result basically destroyed the average analyst estimate of $10.22, while revenue of $17.7 billion was more than $5 billion above the $12.39 billion consensus from Wall Street. Fixed income trading gained 31%, while equities trading rose 68%.
Strong investment banking results at GS were driven by the busy market for special purpose acquisition companies (SPACS). Goldman wasn’t one of the early leaders in underwriting SPAC IPOs but it’s caught up. It ranked third last year in the banking industry, and remains the Wall Street that gets the biggest share of its revenues from trading and investment activity. Its call today could be an opportunity for investors to get an update on how the market for initial public offerings (IPOs) is shaping up for Q2.
The third major bank reporting this morning was Wells Fargo (NYSE:WFC), and they also beat the Street’s consensus for earnings and revenue. Shares rose slightly in pre-market trading. Revenue of $18.05 billion outpaced expectations for $17.5 billion, and earnings per share of $1.05 topped the $0.69 average Wall Street estimate. Some of the earnings beat reflected WFC pulling back cash it had set aside to cover for possible bad loans, however. That was also true for JPM, by the way.
With WFC, it’s kind of interesting to see average loans in consumer banking and lending actually fell 8% in Q1. Commercial banking average loans fell 19%. WFC has a huge mortgage banking business, so does that consumer loan number reflect weakness there? In its press release, the bank cited “low interest rates and tepid loan demand.” It’s pretty certain they’ll get asked about that on their earnings call.
Net-interest income dragged on WFC last quarter, a reminder that banks in Q1 for the most part faced a challenging rate environment. Remember, the comparisons are to Q1 2020, most of which took place before rates went to zero during COVID. The net-interest income line of their earnings reports might turn from headwind to tailwind as the year continues, considering how much higher rates are now than they were last summer.
Round One Over, Bring On Round Two
Tomorrow brings another batch of banks, with Citigroup (NYSE:C) and Bank of America (NYSE:BAC) in the mix. Morgan Stanley (NYSE:MS) rounds it out Friday.
One thing to remember about bank earnings is that the Financial sector had a very strong Q1 on Wall Street and a bunch of the big bank stocks “faded” the start of earnings season. They either flatlined or went down, coming under more pressure on Tuesday.
This could reflect a little muscle memory on the part of investors, who may be remembering last quarter when bank shares frequently lost ground in the market despite strong earnings. You never know what “whisper numbers” might be out there, so it might be best to let the dust settle a bit before approaching any big trades in the Financial sector the next day or two. There’s a lot to absorb here, so make sure you’ve digested the news before you trade it.
If you don’t happen to trade in the Financial sector, don’t worry. There’s other stuff out there, including Bed Bath & Beyond (NASDAQ:BBBY) today and Delta Air Lines (NYSE:DAL) and PepsiCo (NASDAQ:PEP) tomorrow. Those should give us a lot of insight into the consumer market, as well as travel.
Another thing to potentially watch today is the Nasdaq direct public offering (DPO) of Coinbase, which operates an online exchange where buyers and sellers can meet to trade Bitcoin and other cryptocurrencies. As Coinbase goes public, there’s been a resurgence in cryptocurrencies. Bitcoin recently jumped above $60,000 for the first time. The average price of Coinbase shares traded on Nasdaq’s private market last month was $343.58, and according to Forbes, valuation of the stock could be $100 billion once it goes public.
Bad News? No Problem For Wall Street Again
Tuesday’s rally to new highs offered something for just about everyone. It started off with a defensive tone, led by Utilities and Real Estate as the 10-year Treasury yield came down following a pedestrian March inflation reading.
While the so-called “defensive sectors” marched in front, that didn’t keep some of the big Nasdaq 100 stocks like Tesla (NASDAQ:TSLA) and Nvidia (NASDAQ:NVDA) from powering higher for the second straight session. Apple (NASDAQ:AAPL) shares are also trading at around two-month highs. Some of the stocks that became popular as “stay at home” plays last year before losing ground amid vaccination progress also had great days. We’re talking Zoom Video Communications (NASDAQ:ZM) and Peloton (NASDAQ:PTON).
If you noticed something here, it’s the absence of some of the “reopening” stocks that helped lead the market earlier this year. Tuesday’s disappointing Johnson & Johnson (NYSE:JNJ) vaccine news might have weighed on airlines, entertainment, and other companies that tend to benefit when people go back out. That wasn’t across the board, however. Boeing (NYSE:BA), for instance, finished higher. So did Southwest Airlines (NYSE:LUV).
The rally in stay-at-home stocks might have reflected the JNJ news, though it’s important to remember that the other two vaccines are still widely available and the JNJ vaccine might only be paused for a bit, according to media reports.
If you look at what worked yesterday, you might think maybe things aren’t making much sense. For instance, bonds rose despite the consumer price index (CPI) hitting 0.6% month-over-month in March and 2.6% year-over-year, with the monthly increase the highest since August 2012. Normally, people might be inclined to sell bonds and get out of “defensive” stocks on news like that, but this time it was the opposite. The 10-year yield finished yesterday near 1.62%, down 16 basis points from last month’s high and near the bottom of its recent range.
Rising inflation without rising borrowing costs can sometimes be a “Goldilocks” scenario for Wall Street, and that’s how investors appeared to treat it Tuesday. The S&P 500 Index carved a new record closing high and the NASDAQ Composite is coming within range of its own record. Also, volatility continued to decline, shrugging off both the vaccine news and the inflation read. The CBOE Volatility Index again sank below 17 yesterday (see chart below).
What does this tell us? Possibly that we’re in a powerful market that’s definitely in a forgiving mood when it comes to bad news. The path of least resistance for stocks continues to seem higher, with the market climbing a wall of worries that just doesn’t go away.
Now we’re entering earnings season, when S&P 500 companies will have to put their money where the market is, so to speak. This typically means more attention is focused on the things that truly matter, including earnings, revenue, and margins, as well as guidance for the coming quarters. Often there’s less distraction from external events, too, meaning maybe less volatility. Volume can also pick up, which tends to contribute toward more orderly trading with fewer whipsaw days. No guarantees, of course.
CHART OF THE DAY: VANISHING VIX. Volatility continues to slide, as seen in this chart of the CBOE Volatility Index (VIX—candlestick) over the last three months. Interestingly, the latest drop, which has now taken VIX well below 20, coincides with a flattening of the 10-year Treasury yield (TNX—purple line). This could be evidence that one reason for higher volatility earlier this year was fear of rising rates, and now that fear has eased as the yield flattened. So if yields start rising again, so could VIX. Data Source: Cboe Global Markets (NYSE:CBOE). Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Valuations High As Earnings Loom, But Down From Earlier in 2021: Going into earnings season, the S&P 500’s price-to-earnings (P/E) ratio for the next 12 months is above 23, according to research firm CFRA, a historically high level. However, if you go back three months to the period right before Q4 earnings season began in January, the SPX was trading at more than 24 times earnings.
That means despite the fact that the SPX is up about 9% since then, strong earnings have actually kept valuations in check. If analysts are right in expecting a 24% gain in Q1 S&P 500 earnings (the FactSet consensus), that means it could open the way for more gains without sending valuations sky-high. Of course, the other scenario is an earnings season disappointment, which might mean investors reconsidering the current high valuations. That would be a bit odd, however, considering recent earnings results have often been better than analysts had expected going into the season.
All that remains to be seen, of course, but helps explain why many investors continue piling into stocks. As the old saying goes, people may not be in the mood to “fight the Fed,” which continues to scoop up $120 billion in bonds every month and keep rates at near zero. That could also help explain why Treasury yields have taken a long breather here from their early 2021 rally. It’s now been more than two weeks since the 10-year yield set a new high for the year. Some analysts say a drop below what appears to be technical support at 1.6% might open up more room for yields to fall.
Greenback Support Breached: We noted here yesterday that the U.S. Dollar Index was trading within a technical “uptrend channel” that dated back to early this year but that it was hard to ignore how close it was to a critical support level. If it broke below the lower channel, near 92.10, we said, DXY could test the 90 level. That’s the low it hit at the end of February. Or it could hold support.
Well, early Tuesday, the DXY did break below its channel, which could have been because of the “not so shocking” CPI reading yesterday. So now the question is whether DXY bounces back or starts to see more selling interest. Sometimes the breach of technical support can trigger more downside action. As noted yesterday, it goes well beyond technicals for the dollar. A lot also depends on economic fundamentals and fresh data. As far as data is concerned, there’s few reports more closely watched than retail sales on Thursday morning, so consider keeping an eye on the dollar when that number bows. A strong read could potentially underpin the greenback.
Spring In Step Seen For Retail Sales: After a disappointing February retail sales report where the headline number fell 3%, analysts look for much better news with the March data Thursday. Consensus on Wall Street is for a huge 5.3% climb month over month, according to research firm Briefing.com. If that turns out to be the case, keep things in perspective because some of the strength will likely reflect the easy comparison with February, which was down due in part to those ugly winter storms and a tough comparison to January.
If analysts are right about the number, it would be the best monthly performance since last June when the economy was coming out of the first wave of COVIDIf you trade the stocks of any major consumer discretionary retailers, areas of the report to consider watching include furniture and electronic and appliance stores, all of which were weak in February. Non-store retail sales (think online) also took a hit in February, but that probably reflected a very tough comparison with the January read. As noted above, a strong report might give the dollar a lift, and also might support the 10-year Treasury yield.