What Blockbuster US Bank Earnings Mean for Markets?

Market volatility drove strong trading revenue growth for US banks amid signs of resilient corporate and consumer spending, leaving markets more confident at the start of earnings season.

The Key Things Markets Are Reacting To

• US banks post record returns based on trading profits amid high volatility, offsetting geopolitical concerns.
• Markets react positively to the start of earnings season, with tech shares extending their influence on the market.
• After posting solid earnings in the last quarter, major US bank executives express caution about the outlook, pointing to high valuations and geopolitical risks to the economy.

US Banks Post Record Profits

Q2 earnings season unofficially kicked off with reports from major US banks, including JPMorgan, Wells Fargo, and Citigroup. There was an unusually large concentration of banks on a single day, but overall, the reports fit broadly within the same major themes. Many reported record or near-record trading results driven by increased market volatility and M&A in the second quarter. Dealmaking was among the most bullish in years amid consolidation across multiple markets, as well as headline-making IPOs such as SpaceX's launch, which alone generated fees of around $500M. The positive results in the investment bank segment generally beat elevated market expectations and were bolstered by resilient consumer spending. However, when it came to the outlook, commentary was more cautious, with executives questioning whether the current market was overheating and warning that the prolonged conflict in the Middle East might weigh on M&A activity. Another factor that is traditionally positive for banks but weighs on the rest of equities is growing expectations that the Fed will raise rates later in the year.

The market reaction was generally positive, though individual stocks of the reporting banks had mixed results, with tech shares generally supporting the market amid a semiconductor rebound. The DJIA barely eked out gains, dragged down by a 25% plunge in IBM after it warned earnings would likely be lower due to weaker software sales. The index is set for positive performance on Thursday after cooler-than-expected inflation led traders to speculate that the Fed will hike later.

Key Takeaways of Major US Bank Earnings

Overall, investment banks outperformed commercial banks, driven by strong trading activity that bolstered Morgan Stanley, JPMorgan, and Citigroup, while Wells Fargo's earnings beat relied on cost management. The notoriously bearish JPMorgan CEO Jamie Dimon touted his bank's record revenue and expressed confidence in the resilience of the US economy. Analysts flagged that high trading revenue is tied to high volatility and AI moves, suggesting that even more conservative sectors of the economy, such as financials, are becoming reliant on the tech sector. Bank of America's earnings beat on the top and bottom lines, but traders noted that it was primarily due to its investment banking segment, suggesting that recent bank outperformance relies on less regular M&A activity rather than consistent consumer growth. Morgan Stanley was the outperforming bank, posting record revenue and profit after its equities trading unit saw revenue increase by 69% over the last year. The bump up in all major equities following the start of earnings season suggests markets are taking a positive outlook for the rest of the month.

Dow Jones Forms Double Top For Now

Looking at the daily chart of Wall Street, the upper VWAP rejected bulls, forming a double top at 52850 while paving the way for the lower VWAP at 52300 and subsequently the 52K support. However, if 52500 holds firm and the Dow Jones bounces off it, the protrends indicator points to 53450 in the medium term, a new record high above 53340.

Source: SpreadEx | Wall Street, Daily Chart