Shares of JPMorgan and others have been rallying, but the struggles faced by everyday Americans were visible in their earnings. By Rebecca Ungarino
Wall Street is back. Main Street? Not so much. That's the big takeaway after the largest U.S. financial institutions reported this earnings season.
JPMorgan Chase, Citigroup, Wells Fargo, Bank of America, Morgan Stanley, and Goldman Sachs showed investors that one thing is certain: Large transactions are returning. That's enriching dealmakers, driving banks' profits, and pushing their stocks higher.
Companies are back to asking bankers for advice on expensive acquisitions and sales after a period of very little activity, brought on by the Federal Reserve's quest to tame inflation by hiking borrowing costs. Executives and investors had been unsure about making big moves with political, regulatory, and monetary policy uncertainties hanging over their heads.
That hesitancy has started to fade as investors more confidently expect that interest rates will fall this year and the economy will avoid a recession.
JPMorgan Chase said its investment banking fees rose 52% from a year ago due to across-the-board strength in the business, while those fees at Wells Fargo, Morgan Stanley, and Citigroup rose 70%, 51%, and 63%, respectively. More deals are in the works, too. "Investment banking pipelines are healthy and diverse, dialogues are active, and markets are open," Morgan Stanley Chief Financial Officer Sharon Yeshaya told analysts on Tuesday.
Such appetite for deal making illustrates companies' growing confidence in paying up -- or taking on more debt -- for big deals. That does and should reflect a solid economy. At the same time, the latest results signaled a delicate picture for many consumers struggling with stubborn inflation and high interest rates.
Citi's CFO Mark Mason said on the call to discuss second-quarter earnings that the U.S. consumer has been "resilient," but he noted diverging behavior between those with higher and lower creditworthiness and incomes. "When we look across our consumer clients, only the highest-income quartile has more savings than they did at the beginning of 2019," Mason said. Customers with FICO scores over 740 are driving spending growth, while those with lower scores are falling behind on payments, he said.
Wells Fargo described a similar trend. Overall "spending continues to be strong," Michael Santomassimo, the bank's finance chief, said on a call with reporters. He acknowledged, though, that as pandemic-era stimulus winds down and inflation sticks around, "there has been more impact on the folks in the lower end of the wealth and income spectrum, and I think that's continuing to play out."
Consumers accumulated savings during the pandemic, but "the savings have been depleted now and the consumer is hurting because of higher rates that are really putting a strain on their finances," said Alexis Deladerriere, head of international developed markets equity for Goldman Sachs Asset Management. They are still spending, he said at an event Goldman held for the press on July 9, but they are "a lot more discerning."
Financial pressures on the average American forced JPMorgan to take more "charge-offs," or outstanding debt that banks write off as losses because they don't believe they'll be paid. JPMorgan's net charge-offs rose by $820 million to $2.2 billion from a year ago, primarily from credit-card holders, which JPMorgan CFO Jeremy Barnum attributed to a return to normal levels rather than a troubling indicator. Charge-offs in the second quarter rose by 46% and 45% in the consumer segments of Wells Fargo and BofA, respectively, from a year ago.
UBS economists led by Abigail Watt told clients in late June that the U.S. economy is going through an "underappreciated" slowdown, pointing to slowing gross domestic product growth and softness in retail sales and savings. "The top of the income distribution is still flush with cash, but the rest...much less so," she wrote.
Meanwhile, larger borrowers are expressing some hesitancy about where the economy is headed. Barnum, JPMorgan's CFO, said on his firm's earnings call that demand for new loans is still muted as midsize and large corporate clients "remain somewhat cautious due to the economic environment."
All told, bank investors have a lot to be happy about. Shares of Morgan Stanley, Goldman Sachs, and JPMorgan hit record highs, BofA's stock notched its best day since December, and Citi is trading near its highest level in two years. Even Wells Fargo, which dropped 7% after reporting earnings on July 12 as the worst performer in the S&P 500 that day, is up 1.4% in July through Tuesday's close. They have been boosted by the rising likelihood that the Fed will cut rates in September, expectations for less onerous regulations, and the rising possibility of a Republican sweep in U.S. elections in November.
Bank stocks are behaving as if all the fears investors were talking about just a month ago have faded away. Not quite. If Main Street's already fragile health weakens further, the gains could be short-lived.
Write to Rebecca Ungarino at rebecca.ungarino@barrons.com
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(END) Dow Jones Newswires
July 19, 2024 21:30 ET (01:30 GMT)
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