Major Banks Warn of Economic Slowdown

Profits for major banks rose, but traders were primarily concerned about warnings of an impending economic slowdown due to tariff-driven uncertainty.

Bankers Convene to Discuss Tariffs

The primary concern from the markets does not appear to be the tariffs themselves but rather the uncertainty surrounding which goods will be subject to levies, at what rates, and when they will be implemented. For instance, the recent 145% tariff on China, announced on Friday, was subject to "clarification" over the weekend, as media reports indicated that smartphones, computers, and other semiconductor-based technology were excluded from the levy. However, the White House had already said that semiconductors were excluded, though it was not communicated clearly enough to the market amid the progressive escalation of rates between the US and China, generating uncertainty. Additionally, over the weekend, the heads of major global banks held a conference call to discuss the fallout and consequences of the tariffs. Major banks facilitate financing for global trade, and the constant changes in the rules are having an adverse impact.

Before reporting earnings on Friday, JPMorgan warned that a recession was likely in the wake of Trump’s tariffs. The world's largest bank reported higher earnings per share (EPS) and return on equity (ROE) compared to the prior period. Still, CEO Jamie Dimon addressed the trade situation directly in the earnings release, saying that the trade wars were detrimental. However, Dimon is known for adopting a particularly cautious outlook to justify maintaining a substantial cushion at his bank, having previously argued for a high likelihood of a recession in 2023 and 2024.

Recession, Stagnation or Something Else?

Investment firm BlackRock also reported on Friday, with its CEO Larry Fink stating that the tariffs "went beyond anything I could have imagined" and that his fear of a recession had risen sharply. He also posited that he expected a general economic slowdown until the uncertainty surrounding tariffs is resolved, potentially after the 90-day pause expires. Despite these concerns, he suggested that the US economy was not in a financial crisis and that the "megatrends" such as AI, are still in place for growth once the uncertainty has been resolved.

Another major bank CEO who echoed the message about uncertainty was Charlie Scharf of Wells Fargo. The bank saw its earnings beat estimates, but the cloudy outlook garnered the most attention. Scharf stated that the bank expects "continued volatility and uncertainty and are prepared for a slower economic environment in 2025," but the outcome would depend on policy changes. In line with this, JPMorgan CEO Dimon predicted that major US companies would likely withdraw their guidance this quarter, precisely due to tariff policy uncertainty. With the heads of major companies that make up the DJIA uncertain about the future, investors might also stay on the sidelines. Even if businesses beat earnings expectations, the market's enthusiasm might be muted throughout the earnings season as guidance takes priority in the uncertain environment.

Dow Jones Forms V-Bottom?

The Dow Jones has formed a double bottom at 37K following a V-bottom formation in the aftermath of a record-peak reversal at 45K, which could lead to 42850 should 41K give way to bulls. However, a decline towards 36600 remains possible, especially if 38390 shows weakness. As the index trades above the 40K round support, the odds of swinging towards either direction at par, the index may range.

Source: SpreadEx / Wall Street

Key Takeaways

Major banks reported higher profits last week, but their CEOs sounded the alarm on the economic uncertainty caused by the ongoing trade wars and constantly shifting tariff policies. As such, fears of a potential recession increased with expectations of at least a significant slowdown until the situation is resolved.