JP Morgan and Wells Fargo kicked off the third-quarter earnings season on Friday. JP Morgan handily beat expectations for EPS and revenue. Furthermore, its charge-offs were slightly below expectations as credit quality remains solid. However, they increased their credit loss provision, as shown in the graph courtesy of ZeroHedge below. Such tells us they think credit losses will increase going forward. Further, CEO Jamie Dimon provided a cautious economic outlook as follows:

We have been closely monitoring the geopolitical situation for some time, and recent events show that conditions are treacherous and
getting worse. There is significant human suffering, and the outcome of these situations could have far-reaching effects on both short-term economic outcomes and more importantly on the course of history. Additionally, while inflation is slowing and the U.S. economy remains resilient, several critical issues remain, including large fiscal deficits, infrastructure needs, restructuring of trade and remilitarization of the world. While we hope for the best, these events and the prevailing uncertainty demonstrate why we must be
prepared for any environment.

Wells Fargo also beat expectations on earnings per share, but its EPS was lower than the same quarter last year. Its return on capital, another measure of profitability, also fell from last year. Investment banking fees helped drive earnings and offset a decline in lending revenue.

A steadier flow of earnings reports across various industries will start next week. While most are likely to beat reduced expectations, comments and projections from their executives will help shed more light on the state of the economy.

What To Watch Today

Earnings

No notable earnings releases today.

Economy

Market Trading Update

On Friday, we discussed the recent selloff in bonds and why a decent trading setup is forming. However, an even more bullish setup is forming in the stock market. Last week’s newsletter noted that the “ascending wedge” pattern in the market developed from the August lows. To wit:

“An ascending triangle is forming on the daily charts, another bullish pattern that typically signals further upward movement. In this case, we’ve seen a series of higher lows in recent weeks, indicating buyers are stepping in earlier during each pullback. The flatter upper trendline from the previous to the recent all-time high indicates an ongoing increase in buying pressure.”

On Friday, the market broke out to the upside of that wedge pattern, triggering a “seasonal MACD buy” signal. Notably, that buy signal also marks the beginning of the seasonally strong 6 months of the year. The series of high lows, now combined with higher highs, remains a significant bullish backdrop for investors. With earnings season starting in earnest this coming week, the bias remains to the upside, but risk management protocols should not be abandoned.

Just because the seasonally strong period of the year has technically started, it doesn’t mean that the markets won’t have corrections along the way. The market is short-term overbought, so use the current rally to rebalance risk as needed, but pullbacks to support should be bought.

The Week Ahead

The Retail Sales report on Thursday will provide an update on consumer activity. The estimate is for a 0.2% gain, which points to no growth after adjusting for inflation. Four of the last five months have shown zero aggregate retail sales growth. The one outlier was July, which saw retail sales grow by 1%.

Fed speakers will be aplenty this week. With Bostic discussing the possibility that the Fed doesn’t cut at the next meeting, as discussed below, it will be informative to see if other Fed members are on the same page.

Earnings releases will pick up this week after JP Morgan and Wells Fargo reported on Friday. The larger companies reporting are UNH, PG, JNJ, BAC, NFLX, and AXP.

Bostic Opens The Door To No Rate Cut

Following the CPI data on Thursday, Atlanta Fed President Raphael Bostic was quoted as saying, “I am totally comfortable with skipping a meeting.” However, the data didn’t seem to change the mindset of other Fed members. To wit:

Month to month, there’s wiggles and bumps in the data, but we’ve seen this pretty steady process of inflation moving – John Williams New York Fed

He then said it was “appropriate” to continue bringing monetary policy to a more neutral stance. Autstan Goolsbee and Thomas Barkin agreed with Williams, leaving the market to assume that they, too, believe that rate cuts at the next two meetings and beyond are probable. While most other members lead us to think that two 25bps rate cuts are still on the table for this year, the market is starting to handicap the odds they do so at both meetings. As shown below, the market now assigns an 18% chance they do not cut at one of the two remaining meetings.

GDP Report Continues To Defy Recession Forecasts

The Bureau of Economic Analysis (BEA) recently released its second-quarter GDP report for 2024, showcasing a 2.96% growth rate. This number has sparked discussions among investors and analysts, particularly those predicting an imminent recession. There are certainly many supportive data points that have historically predicted recessionary downturns. The reversal of the yield curve inversion, the 6-month rate of change in the leading economic index, and most recently, consumer confidence warn of a recessionary onset.