19 Jul Capital 19 Catch-Up

Banks Smash Earnings As Core Prices Rise At levels Not Seen Since 1991

Stellar earnings reports from the banks couldn’t stem concerns over a rise in inflation as the major indices struggled to hold onto record highs last week. The S&P500 locked in its 39th record high of the year on Monday, which is its twelfth highest amount of closing records for any given year since world war 2. However, by the end of the week the Dow, the S&P500, and the Nasdaq had all broken their three-week winning streaks.

The Nasdaq fared the worst of the three as mega tech stocks copped a beating across the board. It fell 1.87% as the likes of Facebook (FB), Amazon (AMZN), and Netflix (NFLX) all fell heavily. The S&P500 was in second spot as the financial sector remained steady but the energy sector officially went into correction territory. The benchmark index dropped 0.97% for the week. Which left the Dow as the weeks best performer, falling 0.52% despite Boeing dropping hard as a flaw in its Dreamliner plane forced them to slow production.

The big financial institutions kicked off earnings season this week and nearly all beat estimates on the top and bottom lines. JP Morgan (JPM) started the week out in style with an $11.9 billion profit thanks to loan losses that had been set aside and not needed. Goldman Sachs (GS) also reeled in its second-highest revenue number ever thanks to an IPO rush during the second quarter. Both, however, suffered small share price falls after announcing.

Bank of America (BAC) was the only major bank to miss estimates on revenue, but it still easily beat on profits. It too fell on its announcement. Wells Fargo (WFC) was also boosted by $1.6 billion it had set aside in credit loss reserves as it easily beat on the top and bottom line. It was was one of the few banks to rise after its numbers were released.

Citigroup (C) also beat expectations but suffered a revenue decline of more than 12% despite a $1.1 billion loan loss boost. CEO Jane Fraser stated of its results “The pace of the global recovery is exceeding earlier expectations and with it, consumer and corporate confidence is rising. We saw this across our businesses, as reflected in our performance in investment banking and equities as well as markedly increased spending on our credit cards. While we have to be mindful of the unevenness in the recovery globally, we are optimistic about the momentum ahead.” Citi dropped 1% despite rising initially.

Outside of the financial sector, Pepsico (PEP) impressed with its second-quarter earnings and gained 2.3%. The soft drink maker says it saw a return of demand from restaurants and other outlets as businesses across the globe reopened (except for here in Oz where they are shutting down again). Revenue jumped more than 20% year on year and the company raised its outlook for full-year growth. The company closed at all-time highs on Friday at $155.82 and is up just under 14% from when we recommended it in July of last year.

For the 18 S&P500 companies that beat earnings during the week, the average beat was 18% higher than estimates. Yet, these companies saw share price falls of 0.58% on average. This suggests a lot of these price beats are already locked into current prices with the market on a tear over the last twelve months. So far the results have been impressive, however, for a company to jump higher they will need to announce something above and beyond what everyone is already expecting.

The CPI numbers also came out this week and had investors concerned over what the Fed would do next. Prices were up 5.4% in June which was its fastest increase in twelve years. Core CPI, which excludes food and energy prices, was up 4.5%, it’s the indexes sharpest move since September 1991. Remember, June was the pandemic high point in 2020, and inflation was at all-time lows. The numbers started rising from there, so we would like to see the year-on-year numbers start decreasing from July onwards.

We had lots of Fed Reserve member action throughout the week to help digest the numbers. San Francisco Fed reserve president Mary Daly said she believes the lift in inflation will only be temporary, however, “It is appropriate to start talking about tapering asset purchases, taking some of the accommodation that we have been providing to the economy down”.

Fed Reserve Chair Jerome Powell also testified to the House Committee On Financial Services during the week and reiterated that they still had leeway on making any moves and that the economy was progressing nicely. He stated ” At our June meeting, the Committee discussed the economy’s progress toward our goals since we adopted our asset purchase guidance last December. While reaching the standard of ‘substantial further progress’ is still a ways off, participants expect that progress will continue”.

On Thursday he was again in front of the Senate Committee on Banking, Housing, and Urban Affairs and he seemed a little less confident. “The challenge we’re confronting is how to react to this inflation, which is larger than we had expected or that anybody had expected. To the extent that it is temporary, then it wouldn’t be appropriate to react to that. But to the extent that it gets longer and longer, we’ll have to continue to reevaluate the risks that would affect inflation expectations and would be of longer duration and that’s what we’re monitoring”. These next few inflation data releases are going to be big market movers.

The upshot out of all of this is that the economy is still growing. Sure, it’s not at the pace that it has been over the last twelve months, but that was when it was bouncing back off lows not seen in most of our lifetimes. There’s going to be initial inflation, and growth will slow, but there’s still a long way to go before the economy is back to where it was pre covid. The economic data should be keeping markets happy for a long time to come. It certainly sounds like the Fed are going to stick to their guns and let inflation ride out this little period. And if things start to settle from here on we should hit a nice little sweet spot.

In the week ahead earnings will kick off in full with some of the biggest names on the market releasing their numbers. AutoNation (AN) and IBM (IBM) will start us out tonight, with United Airlines (UAL) and Netflix (NFLX) giving us their numbers tomorrow. Verizon (VZ), Johnson & Johnson (JNJ), and Coca-Cola (KO) will report on Wednesday, while on Thursday we’ll see results from American Airlines (AAL), Twitter (TWTR), and Domino’s Pizza (DPZ). To round out the week American Express (AXP), and Kimberly Clark (KMB) will report.

The economic calendar sees housing starts and construction data early in the week, followed by existing home sales and the flash PMI scores for manufacturing and services. It’s also a busy week for IPO’s which can only mean good things for the big finance companies. Included will be the debut for Saudi backed electric car maker Lucid Motors which could prove to be a thorn in the side to the likes of Tesla (TSLA).

Have a great week.