Risk-off" sentiment appears to be building on Wall Street ahead of the weekend, characterized by falling Treasury yields and investors backing away from the big tech stocks that rallied yesterday. Geopolitical concerns mounted even as three major U.S. banks reported better-than-expected results.
Big bank earnings beat expectations, Treasury yields fall on geopolitical worries
Consumer sentiment data awaited shortly after open, could show inflation concerns
Monday opens with March Retail Sales, additional bank results as earnings roll on
(Friday market open) Despite relatively solid results from a handful of the biggest U.S. banks to unofficially kick off Q1 earnings season, major indexes lost ground in premarket trading,
The S&P 500® Index (SPX) is on pace to retreat for a second consecutive week amid signs of “risk-off” sentiment driven by geopolitics, but the tech-heavy Nasdaq Composite® ($COMP) is up for the week following yesterday’s sharp rally.
JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) exceeded analysts’ average earnings per share (EPS) and revenue expectations in Q1, aided by solid trading revenue and lower-than-expected provisions for credit losses in the case of JPMorgan. Wells Fargo’s results came despite a sharp drop in net interest income, or the money banks make lending minus what they pay to customers.
Often, not always, big banks can help set the tone for earnings season in general. Bank reporting continues with Bank of America (BAC), Morgan Stanley (MS), and Goldman Sachs (GS) all due early next week.
Before then, today features a look at April consumer sentiment and three more Federal Reserve speakers. Yesterday’s fierce tech-driven rally late in the session didn’t initially spill over into premarket trading this morning as mega-cap stocks traded mostly lower ahead of the open.
U.S. Treasury yields are also slightly lower this morning, which is sometimes a tailwind for stocks. The yield weakness appears connected to softer-than-expected Chinese trade data. Geopolitical concerns, including worries about tension between Israel and Iran, could also be driving some buying in Treasuries as investors seek perceived safety going into the weekend.
The last two rocky weeks, characterized by exuberant U.S. economic data accompanied by climbing yields and a spiking dollar, dramatically diminished hopes for a June rate cut. That means the environment is far different now from when banks last reported in January.
“Expectations for rate cuts are quickly getting pushed back,” said Cooper Howard, a director of fixed income strategy at the Schwab Center for Financial Research. “We expect the Fed to still cut rates this year, but it will be dependent on inflation and the path of the economy.”
Futures based on the SPX dipped 0.3% shortly before the close of overnight trading and futures based on the Nasdaq-100® (NDX) dropped 0.5%. Futures based on the Dow Jones Industrial Average® ($DJI) fell 0.2%.
Banks take center stage: Shares of JPMorgan Chase initially dropped about 4% in premarket trading following its results, but then clawed back some of those losses. Wells Fargo shares gained about 1% initially before slipping into the red.
JPMorgan Chase reported an 11% year-over-year rise in net interest income, slightly under Wall Street’s expectations. Higher rates for longer could help extend the net interest income banks gather, though it’s a two-way street because higher rates mean banks also must pay depositors more. JPMorgan Chase’s forecast for full-year net-interest income fell just shy of analysts’ expectations, which might be one reason the stock slipped this morning.
From a trading standpoint, JPMorgan Chase lost ground compared with last year’s Q1 as revenue fell 5% in that category. Still, trading results came in ahead of analysts’ expectations. It was a tough comparison versus the year-ago quarter when volatility spiked as the U.S. banking sector faced jitters following highly publicized regional bank failures.
Another interesting aspect of JPMorgan Chase’s earnings was the company’s decision to post a much smaller provision for possible loan losses than analysts had expected. These provisions, which hurt the profits of banks, became swollen industry-wide during the pandemic and again amid last year’s bank failures. A smaller provision might signal that the company feels the credit environment has improved, with less chance of defaults.
Wells Fargo, which has often lagged other big banks over the last few years after a controversy regarding its sales practices led to a government consent order, easily beat Wall Street’s consensus earnings and revenue views and repurchased more than $6 billion in shares. The company’s losses in net interest income were more than offset by increases in non-interest income, Wells Fargo said in its press release.
Citigroup, like JPMorgan Chase, received a boost from solid quarterly performance in its trading division. However, the company’s guidance for fiscal 2025 was slightly below Wall Street’s consensus. Citigroup is in a period of structural transformation designed to streamline the business, and said it made progress during the quarter. Shares rose slightly in premarket trading.
As bank executives take their mics this morning and next week, it’ll be important to get a sense of how they think a “higher for longer” rate climate might shape economic activity, not just for the banks themselves but for their business and consumer clients. Listen for any signs of optimism dampening. The big banks, through their exposure to so many companies across various sectors, have their fingers on the pulse of the U.S. business barometer.
We got a taste of one bank executive’s thinking earlier this week when JPMorgan Chase CEO Jamie Dimon released his annual shareholder letter, saying odds are much lower for a “soft landing” than the 70% to 80% chance he believes the market is pricing in. Dimon defines a soft landing as “modest growth along with declining inflation and interest rates.”
Breadth narrows: It’s interesting that just as the banks report, the financial sector lost much of the steam it gathered over the last few months. By midday Thursday just before the markets pivoted in a late recovery, only 45% of financial stocks traded above their 50-day moving averages, down from 87% a week earlier.
At the same juncture yesterday, 60% of utilities stocks were above their 50-days, versus 93% a week ago. Materials also lost ground from a breadth standpoint. This can happen when yields suddenly spike, as they did earlier this week after the Consumer Price Index (CPI) report showed inflation remaining hot. The data and rising yields sent investors scurrying from dividend payers, small caps, and cyclicals that often skid when borrowing gets expensive.
Instead, many investors flocked toward the perceived “safety” of mega-cap tech stocks, a popular theme last year as rates rose toward their current 17-year peaks. That said, no stock investment is truly “safe,” as anyone who owned tech shares in 2022 probably remembers. The seismic sector shift represents a 180 from the market’s recent improved breadth in which many sectors gained on big-tech.
Stocks on the move:
Sentiment read: Data-wise, we’re past most of this week’s key numbers, though University of Michigan preliminary April Consumer Sentiment drops soon after the open today. It wouldn’t be surprising to see sentiment clipped by higher gas prices, which recently reached a national average of $3.60 per gallon, according to government data.
Approaching the report, analysts expect a headline figure of 78.8, according to Briefing.com, down from 79.4 in March. Inflation expectations for the year ahead loom large, standing at 2.9% in March. That was down from 3% previously. Five-year inflation expectations dropped to 2.8% at the end of March from 2.9%.
Though the sentiment survey’s inflation readings could have some market impact later today thanks in part to this week’s hot CPI data, it’s important to remember that the University of Michigan survey is on the smaller side in terms of the number of people surveyed.
Week ahead: The titanic triumvirate of monthly reports (jobs, CPI and PPI) and their associated volatility is in the rear-view mirror, though the ground-shaking impact is still being felt on Wall Street. Next week is less powerful from a data standpoint. Various housing reports could give investors a better sense of the real estate market, but the data were collected before this week’s yield spike lifted mortgage rates.
Thursday in review:
U.S. stocks bounced back Thursday from the previous day’s sell-off as a lower-than-expected Producer Price Index (PPI) report assuaged inflation worries and resurgent technology shares sent the Nasdaq Composite to a record close.
Chipmaker strength lifted the PHLX Semiconductor Index (SOX) more than 2% and extended the benchmark’s year-to-date gain to more than 17%. Communications services and transportation shares were also among the strongest sectors.
Early today, futures traders saw 98% odds the Federal Open Market Committee (FOMC) will keep rates unchanged following its April 30 to May 1 meeting, based on the CME FedWatch Tool. Chances of a quarter-point rate cut following the FOMC meeting in June are seen at around 26%, rising to roughly 53% for the late-July meeting.
CHART OF THE DAY: DOLLAR BREAKS OUT: The idea that U.S. rates could stay higher for longer broke the U.S. Dollar Index ($DXY-candlesticks)out of its long-term range (red lines) and well above its 20-day moving average (blue line). A rising dollar can represent trouble for the global economy. Data source: ICE. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Ideas to mull as you trade or invest
Wake up with retail: Unusually, the week ahead features March Retail Sales on Monday, a report that typically comes out in the Tuesday-Thursday timeframe. Analysts see U.S. retail sales growing 0.3% in March, down from February’s 0.6%, according to Trading Economics. The strong February figure came off a slow January that suffered the impact of unusual winter cold and storms. As always, it’s important to break out volatile car sales from overall retail sales. The U.S. automobile market is on pace for a decent year so far, based on recent data, but with autos excluded, analysts expect March retail sales to outrun the overall reading, at 0.4%. Any deviation above 0.4%, already a pretty strong figure, would potentially support Treasury yields.
Valuation considerations: Even following pressure this week from the hotter-than-expected CPI data, the SPX remains at a forward price-to-earnings (P/E) ratio that’s historically high, slightly above 20, according to FactSet. It was below 17 last October when the SPX carved its most recent lows. Valuations could be key as we head into earnings, because if Q1 earnings and guidance fail to meet expectations, analysts might have to roll back their thinking for double-digit full-year earnings gains. That would potentially make the indexes look pricier.
Rates could clip earnings: Overall Q1 S&P 500 EPS growth estimates have dropped from well over 6% at the start of the year to around 3% today, although they’ve stabilized the last few weeks. Analysts generally see earnings improving throughout the year, with research firm FactSet pegging calendar-year EPS growth at 10.9% following a slow start of just 3.2% growth in Q1. Many analysts think S&P 500 EPS could post double-digit gains again in 2025. However, the path of interest rates may ultimately influence how much earnings improve because if rates remain high it could slow consumer spending and business investment. One earnings metric to watch could be net profit margins, which appear to be stabilizing for S&P 500 companies. Analysts expect an 11.5% average net profit margin in Q1, FactSet said, down just barely from 11.6% a year ago. Look for a possible earnings estimate update later today from FactSet.
April 15: March Retail Sales and expected earnings from Goldman Sachs (GS).
April 16: March Housing Starts and Building Permits and expected earnings from UnitedHealth (UNH), Johnson & Johnson (JNJ), Morgan Stanley (MS), and Bank of America (BAC).
April 17: Expected earnings from Abbott Labs (ABT), ASML (ASML), Travelers (TVR), U.S. Bancorp (USB), and Alcoa (AA).
April 18: March Existing Home Sales, March Leading Economic Indicators, and expected earnings from Alaska Air (ALK), Marsh McLennan (MMC), and Netflix (NFLX).
April 19: Expected earnings from American Express (AXP), SLB (SLB), and Procter & Gamble (PG).
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