Investors look to bank earnings season for signs of a recession


The US economy might be headed for a recession — or it might not be. Investors will be looking to bank earnings to clear up the question.

The big banks start reporting second-quarter earnings this week, and what executives say about the state of the economy might matter to investors even more than how much profit the companies report.

Bank executives have broad insight into the strength of the US economy, since their companies peer into the finances of millions of American households. Lately, the bankers aren’t in lockstep about where the country is headed.

There is good reason for disagreement. The quarter was characterized by some promising economic data, like decent hiring and consumer spending. Yet the highest inflation in decades is still raging, hurting businesses and households alike, and people are growing more pessimistic about the economy.

A wobbling Chinese economy and Russia’s war against Ukraine, which upended commodities markets, are injecting more uncertainty into the mix. Just 19% of leaders at midsize businesses are optimistic about the US economy, according to a survey released last month by JP Morgan. A year ago, it was 75%.

At the last round of bank earnings, in April, JPMorgan surprised Wall Street by setting aside $ 900m in new funds to prepare for economic weakness. It bears watching if other banks follow suit this time around.

Whatever the case, bank earnings are expected to be broadly lower, in part because year-ago results were so strong. At the time, corporate deal making pushed banks’ Wall Street arms to big profits, but corporate chieftains are sitting on the sidelines now A year ago, the banks were also releasing some of the money they had set aside for what they feared would be a wave of bad loans, boosting their bottom lines.

READ El-Erian: Crises of growth, energy, food and debt all at once is a nightmare scenario

The six largest US banks are expected to report $ 27.2bn in combined profits for the second quarter, according to FactSet, down 10% from the first quarter and down 35% from a year earlier.

JPMorgan reports its quarterly results 14 July, along with Morgan Stanley. Wells Fargo and Citigroup follow on 15 July, while Bank of America and Goldman Sachs report on 18 July.

Here’s what else to watch:

Investment banking and trading

Wall Street arms are coming back to earth from their pandemic highs. While merger and acquisition activity is still strong by historical standards, it fell 24% from a year earlier in the second quarter, according to Dealogic. Worse, initial public offerings have essentially ground investment banking fees likely dropped by 45 to 50% across the industry in the second quarter, analysts at Deutsche Bank said.

There is a silver lining for banks, however: volatility in stock, bond and commodity markets should give trading desks a big boost. At JPMorgan, trading revenue is expected to rise 15% to 20%, executives said in May. Citigroup expects trading revenue. to jump more than 25%.

Interest rates

Interest rates got a lot higher during the second quarter: The Fed raised rates by half a percentage point in May, and another 0.75 point in June. Another hike is expected this month.

Normally, higher rates are a boon for banks, since they make more money from lending when rates go up. But this time investors appear scared that the rate increases will end in a recession. The KBW Nasdaq Bank Index is down 23% so far this that slightly trails the S & P 500, which recently wrapped up its worst first half in more than five decades.

The state of the consumer

Inflation raged during the first quarter, but consumers still spent heavily on their credit cards.

It isn’t clear what happened in the second quarter.

Bank of America chief executive Brian Moynihan said last month that consumers still have plenty of money and are willing to spend on big-ticket items such as travel. Still, consumer confidence has continued to sour in the face of high food and energy prices. The University of Michigan’s sentiment gauge fell in June to the lowest on record dating back to 1952. People who built up savings during the pandemic have started tapping that stash to cover expenses.

Loans

Lending was sluggish through much of the pandemic, but in some areas it is starting to pick up.

Commercial and industrial loans at US banks approached $ 2.7tn at the end of June, according to the Federal Reserve. That is up 6% from the end of March and up 9% from a year ago.

But mortgage originations are slowing after a pandemic-driven boom in home sales and refinancings. Higher rates have crimped new purchases and made refinancing existing mortgages less attractive.

Write to Charley Grant at [email protected]

This article was published by Dow Jones Newswires, a fellow Dow Jones Group service

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