US Banks Trend to Continue with MS and BOA?

The reports from major US banks keep coming after somewhat mixed results from the "big four", but the trend is expected to continue.

Improving Outlook, Increasing Unknowns

The consensus after the reports of major banks on Friday seems to be that the risk of a hard landing has abated somewhat. In general, the banks posted increased profits and beat expectations. But also, they stashed away more money in case of defaults. The previously doom-and-gloom CEO of JPMorgan, Jaime Dimon, who had warned of an economic hurricane, now reacted ambivalently. There are risks, but we don't know how hard the landing will be, would be a summary of his comments. Other bank leaders echoed the sentiment and, crucially, in the banks' actions. Following the recent dividend increases after the stress tests, the banks returned to holding more reserves at the expense of higher profits.

While some of the major banks saw their stock prices rise after earnings, the S&P500 index of banks fell by 0.9%. The recent shake-up of the banking industry saw larger banks benefitting at the expense of smaller banks, which were seen as more at risk of bankruptcy in the wake of the SVB crisis. Investors are, therefore, likely seeing the good results in the top banks as a sign that smaller banks might report disappointing earnings. However, the major banks to report in the coming days would likely still be on the winning side of that equation, which could lead to another round of earnings beats.

What to Expect from MS and BOA

Like the larger banks, the focus will likely be on profitability, how much each bank has set aside for provisions, and how much new loans have gone down. This will be particularly relevant to Bank of America, which has a strong retail base. For comparison, JPMorgan saw mortgages drop by 23% compared to the prior year, but Wells Fargo saw a decline of 77% in the same period. On the other hand, Morgan Stanley is likely to see more focus on its trading unit, as higher interest rates have also slowed market activity.

Morgan Stanley is expected to see a drop on both the top and bottom line compared to last quarter, with earnings of $1.20 on revenue of $13.0B

Bank of America is also expected to see lower earnings at $0.84 on lower $25.0B revenue.

MS Pending Triangle Breakout

Morgan Stanley appears in an incomplete symmetrical triangle, likely pending an upward and a downward correction before continuing to the predominant trend direction: up. Taking control of $90 will expose the descending trendline and the top of $100, with the latter breaking expected to invalidate the triangle in reference and open up $110. Sliding under $80 might push prices to $72 if $76 gives way, with a high chance of invalidation and a potential flag at play instead.

Source: SpreadX / Morgan Stanley

Key Takeaways

The risk of a hard landing appears to have decreased as banks recorded increased profits and beat expectations. However, they also set aside more money for potential defaults, potentially indicating that smaller banks may report disappointing earnings. Investors will focus on profitability, provision set-asides, and loan activity. Bank of America's performance will be closely watched due to its strong retail base, while Morgan Stanley will face scrutiny on its trading unit, which has been affected by higher interest rates. Both banks are projected to see lower earnings compared to the previous quarter.