Expectations for Banks Are Low, but Are They Low Enough?
The indexes are mixed, oil is down and interest rates are lower early Tuesday as the big banks get ready to kick off third-quarter earnings season. JPMorgan Chase ($JPM), Goldman Sachs ($GS), Citigroup ($C) and Wells Fargo ($WFC) all report this morning, and the reaction will matter more than usual because of the pressure from bonds and inflation expectations.
The geopolitical backdrop has not improved. The Wall Street Journal reports that Iran is fortifying its nuclear sites and rallying its people for a return to fighting. The regime is convinced President Trump is ready to attack again, despite his promise to hold off until after the midterms. Iran is threatening a harsher response against the U.S. and its Gulf allies if he does.
Banks Have Been Hit From Every Direction
Bank stocks have had a hard few months. The KBW Nasdaq Bank Index is down 8.4% over the last three months, while the S&P 500 is up more than 3%. Inflation and the bond market have hurt revenue expectations, and higher rates have put pressure on the bonds banks hold. Many banks have unrealized bond losses on the books.
Meta Platforms’ ($META) Muse agent didn’t help matters. It raised the worry that if an AI agent can move your money to the best rate in an instant, deposits could leave a bank far faster than they ever have before.
Through all of that, bankers and analysts say the businesses have been fairly stable. Barclays analyst Jason Goldberg wrote that the recent weakness “has been driven more by fear than fundamentals,” and he expects a solid earnings season to refocus investors on how the banks are performing.
What I’m Listening For
Rates cut both ways for banks. They benefit right now because they can charge more on loans, but if rates keep climbing, they take losses on their bond portfolios, loan demand slows and they have less room for buybacks.
Investment banking is also a question, as the banks have already warned that trading won’t match a strong second quarter and mergers and IPOs have slowed again. And banks are spending heavily on AI, partly out of fear of being hacked, so investors want to know how big that bill will be.
The reaction will matter more than the numbers. Bank stocks have already been punished. If they can rally on decent numbers, it would be a sign that the fear is overdone and that money is willing to move into something other than the AI mega-caps.
The inflation debate will continue beyond the banks, as the consumer price index arrives on Wednesday and may be even more important than the earnings reports.
The Two Tiers Are Still the Story
The market’s primary issue remains the extreme two-tiered nature of the action and how and when the gap may close. On Monday, the Roundhill Magnificent Seven ETF ($MAGS) hit new all-time highs, but the VanEck Semiconductor ETF ($SMH) and leading AI infrastructure names such as Lumentum ($LITE) were weak. The mega-caps still have safe-haven status, even as worries about capital spending weigh on data centers, chips and other parts of the AI trade.
Game Plan
This market is ugly, with investors in disarray and little clarity. I’m staying patient and waiting for signs of improvement in breadth. The banks will give us the first clue about the market’s mood as earnings season gets underway.
It may be tempting to try to bottom fish, but the prudent move is to keep any buying small at this point. Much of the market is wallowing in a bear market, and few indications suggest it’s over.
At the time of publication, Rev Shark had no positions in any securities mentioned.
