Banking on Banks
Four of the largest U.S. banks reported third-quarter results yesterday: JPMorgan#, Wells Fargo#, Goldman Sachs# and Citigroup#. These banks posted a combined profit of $32 billion, up 14% from a year earlier. Revenue across all four increased 9% to $115 billion. JPMorgan, the biggest U.S. bank by assets and the largest in the world by market capitalization, posted a rare miss compared to expectations. While revenue increased by 10%, JP Morgan’s expenses grew by 12%. Goldman Sachs, meanwhile, blew past estimates for revenue and earnings per share, led by strong equities trading. Wells Fargo said that both consumers and businesses are doing well, and it is not seeing any cracks around delinquency trends. At least not for now.
Citigroup said that while macro environment conditions softened during the third quarter, the global economy has held up remarkably well. In addition to growth from the AI capital expenditure boom, the consumer is still driving growth. The labor market is stable, and the near-term economic outlook remains positive. JPMorgan’s credit and debit card spending was up 10% from a year earlier, while credit card spending at Wells Fargo and Citigroup increased 11% and 12%, respectively. Bank executives broadly pointed to a strong labor market as the buoying force for American consumers. Furthermore, the portion of cardholders with overdue card balances ticked down at JPMorgan and Citigroup, and was flat at Wells Fargo. Bank of America# reported similar trends this morning.
Although bank earnings have been strong, the benchmark KBW Bank Index has dropped more than 10% since mid-August, meeting the definition of a technical correction. The slump has coincided with a surge in Treasury yields and the Federal Reserve’s first interest rate hike in three years. The bank gauge is coming off its worst quarter since early 2023, when a prior episode of rising yields helped trigger a regional bank crisis that hit shares. Bank earnings can serve as a bellwether for economic growth, reflecting consumer and business borrowing and spending trends. Right now, economic growth remains solid. The latest U.S. GDP growth forecast for the third quarter is at 3.6%, adjusted for inflation, and the unemployment rate hovers around a relatively low 4.2%. The CPI inflation report out this morning showed prices were up 3.7% in September from a year earlier, hotter than August’s gain of 3.4% and slightly ahead of the 3.6% expected. Core CPI, excluding food and energy, was up 2.6% over the prior year, taking some steam out of markets this morning.
The Change in the Change
While third-quarter earnings estimates look solid for the S&P 500 Index, 10 of the 11 sectors are expected to post a decrease in the pace of earnings growth. The change in the rate of change. Estimates further out paint a slightly dimmer outlook. S&P 500 income growth is expected to slow to 18% in the first half of 2027 from 25% in the third quarter of 2026 and 28% in the fourth quarter. By itself, the slower growth outlook has not been enough to derail the stock market rally. But with stocks sitting near records and worries growing that inflation pressures are stickier than expected, companies will face a tall task of delivering robust enough results to power stocks higher. While strong performance from a minority of highflying artificial intelligence names has helped to limit losses at the index level, over 40% of stocks in the index are trading at least 20% below their 52-week highs. That means that a large number of the constituents in the S&P 500 are technically trading in bear-market territory.
The Nobel Prize
The Royal Swedish Academy of Sciences awarded the Nobel Prize in economics to two economists whose research centers on the value of forward guidance by the Federal Reserve. This comes at a time when Federal Reserve Chair Kevin Warsh has expressed his views against providing much forward guidance. We entered the year expecting interest rate cuts, but we are ending the year expecting further rate hikes. Markets are pricing in a 50% chance of an October interest rate hike by the Fed and a 90% chance that the Fed overnight rate would end 2027 at least a half percentage point higher than where it is today. New York Federal Reserve President John Williams said Tuesday that he doesn’t see additional rate hikes in 2027 after one more increase this year. Those comments place him at odds with the market and some other members of the central bank. A little forward guidance like this from the Fed might help, but we do not expect the Nobel Prize to change Chairman Warsh’s view toward more guidance anytime soon.
Singer Usher turns 48 today, quarterback Jared Goff turns 32, and fashion designer Ralph Lauren turns 87.
Christopher Crooks, CFA®, CFP® 610-260-2219