Earnings season began with mixed results from three of the largest US banks on Friday. JPMorgan and Wells Fargo beat expectations on the back of higher net interest income, while Citigroup missed the mark on earnings. JPMorgan took the spotlight as it reported record quarterly profits of $14.5B (+67% YoY), partly due to a $2.7B gain on its acquisition of First Republic. Although deposits fell 3% YoY, net interest income rose 44%. Excluding the acquisition of First Republic, net interest income still increased by 38%. Net interest margin contracted slightly to 2.62% from 2.63% in Q1, reflecting a rising cost of deposits. Reserves for loan losses increased during the quarter, but not at a concerning clip.
Bank earnings will continue this week with Bank of America, Goldman Sachs, Morgan Stanley, and a handful of regional banks reporting. The outlook is less favorable for regional banks, as rising costs of deposits impact small/midsize banks more. Banks heavily dependent on trading and investment banking businesses, like Goldman Sachs, are also likely to struggle. The below chart from the Wall Street Journal summarizes the mixed bag of results through last Friday.
What To Watch Today
Economy
Earnings
Regional Banks start to report.
Market Trading Update
The market struggled a bit on Friday after mixed bank earnings rolled in. The recent rotation out of technology into other areas of the market, like energy, reversed a bit, with the old leaders of the “Magnificent 7” holding the market up.
The market was broadly higher for the week, setting a new 52-week high and pushing toward the 78.6% retracement of last year’s decline. A break above that level leaves only minor resistance to all-time highs and would mark the end of the corrective cycle.
This week will bring many corporate earnings reports and, importantly, quite a few regional banks, giving us our first glimpse of risk in the financial sector. Next week, we will start getting Technology earnings to see if reality can live up to the current hope. With the market very overbought, use dips to add to equity exposure opportunistically. The next big event to keep a watch on, besides the slew of earnings, will be the FOMC meeting coming later this month.
The Week Ahead
Corporate earnings will likely be a key driver of stock prices this week. Of importance will be the rest of the banks, especially the smaller regional banks. We will be watching closely for data on deposits, net interest margins, and provisions for credit losses. Bank of America, Morgan Stanley, and several regional banks report tomorrow, while Goldman Sachs reports on Wednesday. Tesla, Johnson & Johnson, Netflix, and several other household names will also release earnings this week.
Economic data will be somewhat light this week. We won’t hear from any of the FOMC members since the Fed’s blackout period for the July meeting takes effect this week. Tomorrow we’ll get retail sales data for June, and Wednesday, we’ll receive housing starts and building permits data for June. As we stated above, the focus will be on corporate earnings this week.
Sentiment is Rebounding
Consumer sentiment jumped to the highest level since late 2021 on Friday. The University of Michigan preliminary index rose 8.2 points to 72.6 in July, its fastest increase since 2006. Continued strength in the labor market amidst slowing inflation is behind the improving sentiment. Still, consumer sentiment remains well below pre-pandemic levels.
Short-term inflation expectations ticked higher to 3.4% from 3.3% in June. Similarly, 5-year inflation expectations moved to 3.1% from 3% in June. The surprise in inflation expectations comes only a few days after encouraging CPI and PPI data sparked gains across the financial markets. Prices of both stocks and bonds pulled back following Friday’s data release.
Used EV Prices Plunge, Led by Tesla
Yahoo Finance recently published an article claiming that Tesla sparked a collapse in used electric vehicle (EV) prices. Used EV prices are plummeting faster than the overall used car market, with a year-over-year decrease of nearly 30% in June 2023, according to a report from auto research firm iSeeCars.com. This decline contrasts with the overall used car market, which is stabilizing, with a year-over-year price drop of 3.6% in June.
“Electric vehicle prices are now falling at nearly 10 times the rate of the average used vehicle, reflecting a clear shift in EV supply and demand,” said Karl Brauer, iSeeCars Executive Analyst.
The primary driver behind the steep drop in used EV prices is Tesla’s substantial price cuts earlier in the year, as Tesla models dominate the used EV market. Other contributing factors include stabilized fuel prices and rising interest rates mixed with cost-conscious buyers. Tesla models occupy three of the top five slots for steepest price drops, with the Model 3, Model X, and Model S seeing decreases of 30.5%, 21.3%, and 19.0%, respectively.
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