(Friday market open) The biggest U.S. banks have a reputation for beating Wall Street’s earnings estimates, and they lived up to it again Friday morning. Solid quarterly performances by JPMorgan (NYSE:) (JPM), Citigroup (NYSE:) (C) and Wells Fargo (NYSE:) (WFC) initially helped trigger fresh stock index future gains to kick off reporting season, but stocks turned mixed after a soft Retail Sales report.

Today’s bank earnings reports follow a solid rally yesterday that saw the (SPX) close at its highest level in two months, led by consumer discretionary, communication services and technology stocks. Strength in these sectors suggests more of a “risk-on” mindset among investors, but it’s possible some of the buying reflects enthusiasm ahead of earnings season.

This week’s rally came despite a growing sense that the Federal Reserve could raise interest rates again when it meets early next month. The probability of a 25-basis-point increase in May was 75% as of this morning, according to the CME FedWatch Tool. Recent cooler inflation data hasn’t changed impressions that the Fed will tighten one more time, though futures trading is pricing in a pause after May and possible rate cuts later this year.

The slowing U.S. economy is under the microscope again this morning as March Retail Sales fell 1% from a month earlier, much worse than the consensus for a 0.4% decline and the sharpest drop since last November. Excluding autos, Retail Sales slipped 0.8%, so the weakness didn’t appear to be isolated. Strength in company earnings this morning accompanied by this weak data could add to confusion on Wall Street as investors gauge the economic picture.

Morning rush

  • The 10-year Treasury note yield (TNX) rose slightly to 3.46%.
  • The ($DXY) fell to a new 2023 low below 100.8.
  • The Cboe Volatility Index® () futures traded at 17.91, not far above their 2023 lows.
  • WTI (/CL) fell to $82.29 per barrel but remained near their 2023 highs.

Just In

Bank Earnings: Of the three major banks reporting this morning, JPM’s looked like the strongest of the bunch. But all solidly surpassed analysts’ expectations, getting earnings season off to a hot start.

JPM: Once again, the biggest U.S. bank kicked off earnings season by easily beating Wall Street analysts’ estimates on both earnings per share (EPS) and revenue. Profit rose 52% from a year earlier, and revenue increased 25%. Revenue gains were driven by a 49% year-over-year rise in net-interest income, which is the spread between the interest revenue banks generate from their loans and the interest they pay to depositors. Rising net-interest income for banks comes courtesy of the Fed’s rate hikes over the last year. EPS of $4.10 compared with analysts’ consensus of $3.41.

The closely watched provision for credit losses was $2.3 billion, including a net reserve build of $1.1 billion, which JPM says was driven largely by a deterioration in the weighted-average economic outlook. The company sees increased probability of a “moderate recession due to tightening financial conditions,” according to its press release.

“The U.S. economy continues to be on generally healthy footings—consumers are still spending and have strong balance sheets, and businesses are in good shape,” CEO Jamie Dimon says in the earnings press release. “However, the storm clouds that we have been monitoring for the past year remain on the horizon, and the banking industry turmoil adds to these risks.”

C: Citigroup’s EPS of $2.19 per share surpassed analyst’ consensus by 51 cents, and revenue rose 11.5% to $21.4 billion. Analysts had expected revenue of $20.07 billion. Some of C’s results include the impact of the company’s recent divestitures, including the sale of its India consumer business. Removing the divestiture-related gains would mean earnings per share of $1.86, C says in its press release. Like the other banks reporting today, C got assistance from rising net-interest income. The company’s allowance for credit losses on loans was $17.2 billion at the end of the quarter. The company guided for fiscal 2023 revenue above analysts’ consensus.

WFC: Net-interest income was also a driving force at WFC in Q1, rising 45% and helping the company exceed Wall Street analysts’ expectations. EPS of $1.23 was nine cents above analysts’ consensus of $1.14, and revenue of $20.73 billion compared with the consensus view of $20.14 billion. Like JPM, WFC raised its provision for credit losses, adding $1.2 billion, compared with $957 million in Q4. “Delinquencies and net charge-offs continued to slowly increase, as expected,” says CEO Charlie Scharf in WFC’s press release.

Though the company’s net-interest income rose 45%, its non-interest income fell 13% in Q1 after rising 12% in Q4, WFC says. The drop in non-interest income was driven by lower results in the company’s affiliated venture capital and private equity business and a decline in mortgage banking income, among other things. The provision for credit losses included a $643 million increase for potential losses in commercial real estate loans, credit card, and auto loans.

UnitedHealth (NYSE:) (UNH) was the largest non-bank firm reporting this morning, and it also beat analysts’ expectations. Shares rose 1% in premarket trading.

Eye on the Fed

With the fed funds rate now between 4.75% and 5%—up more than 400 basis points over the last year—one more 25-basis-point hike isn’t a big a needle mover as the Fed keeping rates elevated throughout 2023, says Schwab senior investment strategist Kevin Gordon. What matters now is the path of policy for the rest of the year.

Higher rates ultimately could weaken the labor market, but judging from Fed officials’ public comments, labor market weakness is a feature—not a bug—in the Fed’s strategy. With rolling recessions across various sectors potentially becoming a more formal recession over time, possible weakness in the labor market could result in bumps in the road for stocks.

Chicago Fed President Austan Goolsbee appeared on CNBC this morning and told the outlet that he believes yesterday’s cool Producer Price Index (PPI) and today’s weak Retail Sales show that the Fed’s policy is working to slow the economy. He thinks ” a mild recession is on the table as a possibility.”

What to Watch

Sentimental journey: The final major data point of a packed data week is due soon after the open with the preliminary April University of Michigan Consumer Sentiment report. Wall Street consensus is for a slight rise to 62.7, up from 62.0 in March, according to Briefing.com.

Softer sentiment, if it’s in the cards, could be a sobering reminder as earnings season begins that consumer demand might not as dependable in coming quarters. This would be even more true if early signs of a weaker labor market seen in recent reports become a trend. As always, look under the hood in today’s sentiment report to get a sense of consumer inflation expectations, something the Fed watches closely.

Week ahead: The economic data released next week shouldn’t be nearly as pivotal as those of the last two weeks, though there are a few reports that may move the markets. Key among those are the March Building Permits and Housing Starts, due out on Tuesday, and the March Existing Home Sales as well as the Conference Board’s Leading Economic Indicators, both set for Thursday. Housing Starts and Building Permits jumped sharply in February, but there might have been a weather story there, with mild temperatures perhaps influencing activity.

Stocks in the Spotlight

Next week brings the full force of earnings season after this week’s appetizer. Some of the key companies expected to report include Lockheed Martin (NYSE:) (LMT), Johnson & Johnson (JNJ), United Airlines (UAL), Tesla (NASDAQ:) (TSLA), American Express (NYSE:) (AXP), Union Pacific (NYSE:) (UNP), Philip Morris (NYSE:) (PM), and Abbott Labs (NYSE:) (ABT), among many others.

Crude Light Daily Chart

CHART OF THE DAY: WHEN THE DOLLAR DIPS. The U.S. dollarfell to about $1.1047 against the euro on Thursday, its weakest level in over a year. So perhaps it’s not surprising to see WTI crude (/CL–candlesticks) and gold (/GC—purple line) both continue to soar, as both tend to firm when the dollar falls. Data source: CME Group (NASDAQ:). Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Pop quiz: What were cumulative S&P 500® earnings per share (EPS) in 2022? Don’t remember? Just over $219 per share. Keep that number in mind as Q1 earnings season informally kicks off today, because if most Wall Street analysts are right, that’s around where it will end up again this year. Estimates from major investment banks are all over the map, CNBC reported yesterday, ranging from just below $200 all the way up to $225. Some are as low as $200, which would represent a 10% EPS drop from 2022—the kind of earnings pullback often seen in a recession. That would align with the projections for a “mild recession” revealed in Fed minutes earlier this week. On average, analysts expect S&P 500 EPS to rise around 1% this year to about $221, according to FactSet. A 6.8% EPS decline this quarter is likely to be offset by EPS growth in the second half, the research firm noted.

Defying gravity? Recent soft economic data and some of the lower EPS projections by analysts seem in line with the Fed’s recession idea, but stock prices indicate that Wall Street isn’t buying into it. The S&P 500 index (SPX) has pivoted around 4,100 for weeks, representing a forward price-earnings (P/E) ratio of around 18. That’s up from 17 earlier this year when the SPX was near its 2023 low of around 3,800. A 17 multiple is close to the 10-year average. For whatever reason, stock market participants have put a relatively high value on equities, which implies they’re looking past the soft earnings outlook or seeing strength in the economy and earnings that analysts and the Fed don’t. It’s likely some, if not most, of the stock market optimism reflects hopes of the Fed “pivoting” to rate cuts later this year. Keep in mind, though, that a Fed pivot would likely be in response to a recession, which tends to hurt earnings and consequently send the “P” in P/E lower, not higher.

Parsing earnings: Barring any geopolitical struggles or more issues with the banking industry, next week’s focus should be squarely back on company reporting and perhaps even veer away from the intense scrutiny of Fed policy. Volatility may surge as so much earnings data crosses the wire, and companies like TSLA and LMT can have a substantial impact on the major indexes if their shares aggressively rally or sell off following any earnings surprises. The market often reacts quickly to company earnings when they hit the tape, but remember to wait for the full story, which you often don’t get until their conference calls.


April 17: April Empire State Manufacturing and expected earnings from State Street Corp. (NYSE:).

April 18: March Housing Starts and Building Permits, and expected earnings from Bank of America (NYSE:), Netflix (NASDAQ:), and Lockheed Martin (LMT).

April 19: Fed’s April Beige Book and expected earnings from Abbott (ABT), Morgan Stanley (NYSE:), Tesla (TSLA), and Travelers (NYSE:).

April 20: March Existing Home Sales and Leading Indicators, and expected earnings from AlaskaAir (ALK), American Express (AXP), AT&T (T), Philip Morris (PM), Taiwan Semiconductor (TSM), and Union Pacific (UNP).

Happy trading,

Disclosure: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

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