(Friday market open) After scampering to 15-month highs this week as investors cheered signs of slowing inflation, major stock indexes embark today on a voyage through earnings season, starting with three of the biggest U.S. banks. Analysts expect overall earnings to remain under pressure for the third consecutive quarter but eventually gain traction in the second half of the year.

JPMorgan Chase (NYSE:) (JPM), Citigroup (NYSE:), and Wells Fargo (NYSE:) shares all rose in premarket trading following the release of their earnings results. These companies have a long tradition of beating analysts’ quarterly estimates, and this quarter was no exception. From a big-picture view, the bank results underscore the relatively resilient nature of the economy—and consumers—in the first half of 2023. That fits with better-than-expected economic data and upward revisions to growth in the first quarter.

Big banks dominate Friday’s earnings calendar before the scope widens next week, with reports expected from American Airlines (NASDAQ:), Philip Morris (NYSE:), Netflix (NASDAQ:), American Express (NYSE:), Johnson & Johnson (JNJ), and CSX (NASDAQ:), among many other companies. Ten of the 12 S&P 500 companies that have reported so far this week beat analysts’ expectations.

Technology shares were among the strongest performers Thursday, with the Nasdaq-100 Index (NDX) and the Philadelphia Semiconductor Index (SOX) both climbing roughly 2% to 18-month highs. Communication services and regional banks were also strong. The S&P 500® Index posted its highest close since April 5, 2022.

Morning rush

  • The 10-year Treasury note yield (TNX) climbed 2 basis points to 3.77%.
  • The ($DXY) slid to 99.91.
  • Cboe Volatility Index® () futures were steady at 13.67.
  • WTI Crude Oil (/CL) eased to $76.79 per barrel but is closing in on its 200-day moving average of $77.35.

The fast-plunging Dollar Index closed below 100 Thursday for the first time since April 13, 2022 due in part to growing expectations that the Federal Reserve may be close to finished increasing rates. This is potentially good news for energy companies because prices tend to rise when the dollar weakens. It also could support info tech firms, which depend heavily on overseas sales.

Stocks in Spotlight

Despite concerns of higher net capital requirements on the horizon and stresses on regional banks, net-interest margin has driven record or near-record earnings for the big banks.

JPMorgan Chase kicked off earnings season in high gear, surpassing analysts’ average earnings per share (EPS) estimate by 40 cents. Revenue topped the average Wall Street outlook by more than $3 billion and net income climbed 67%, fueled by solid loan growth, trading, and rising net-interest income. Almost every line of the bank’s business saw growth in Q2, CEO Jamie Dimon said in the company’s press release, including record inflows for the Asset & Wealth Management business. The U.S. economy remains “resilient,” Dimon said, and consumer balance sheets remain healthy.

  • Dimon’s economic observations generally have Wall Street’s ear. Today he warned that “salient risks in the immediate view” remain, including stubbornly high core inflation that could keep rates elevated; consumers slowly using up their cash buffers; and the continuing war in Ukraine. The bank has a $2.9 billion provision for credit losses to protect it against possible loan defaults.
  • Just as notable is what Dimon didn’t say. A year ago he predicted there was an economic “hurricane coming our way.” His warnings today seem tame by comparison. It will be interesting to hear Dimon’s views on the company’s earnings call regarding chances for a “soft landing”—a buzzword heard on Wall Street this week as some investors think the Fed has made progress fighting inflation.

Wells Fargo’s earnings beat was small compared with Chase’s but encouraging nonetheless considering the company’s struggles over the past decade. Net-interest income again drove gains during the quarter—something all banks have enjoyed as interest rates remained high. Beyond that, non-interest income rose 8%, driven partly by what the bank said was higher trading revenue.

Citigroup’s EPS and revenue both looked better than expected. Shares climbed 2% in premarket trading along with the other big banks. Trading and investment banking revenue both looked better than expectations going in. In its press release, the company referred to a “challenging macroeconomic backdrop.”

Banks weren’t the only ones reporting this morning. Beaten-down shares of healthcare and insurance firm UnitedHealth (NYSE:) spiked 3% in premarket trading following better-than-expected quarterly results and as the company raised its 2023 outlook. The positive results suggest UnitedHealth may be finding a way to manage through challenges, including higher volumes of surgery claims that have raised its costs.

Eye on the Fed

Futures trading indicates a 95% probability that the Federal Open Market Committee (FOMC) will raise interest rates by 25 basis points at its July 25–26 meeting, according to the CME FedWatch Tool.

Chances of a follow-up September hike stand at 13%, and the market expects the July hike to be the last of the year, putting the probability of that above 80%. That clashes, however, with words from Fed Governor Christopher Waller, who in a speech last night said he expects the FOMC to raise rates by 25 basis points twice more this year. Treasury yields are a bit higher this morning, possibly reflecting Waller’s hawkish remarks.

What to Watch

Don’t change channels: Preliminary July University of Michigan Consumer Sentiment is due out soon after the open today. Analysts expect a slight rise in the headline level to 65.6, according to Briefing.com, which is low by historical standards.

One-year inflation expectations are key to the report, and analysts expect no change from the final June reading of 3.3%. Year-ahead inflation expectations have dissipated considerably from 4.4% last December.

Next week’s major report is June Retail Sales, due out Tuesday morning. Analysts expect a bump to 0.5% in June from 0.3% in May, according to Trading Economics.

Beijing interrupts weekend: Consider breaking from your Sunday night activities to check China’s Q2 Gross Domestic Product (GDP) report, due early Monday Beijing time. Consensus is for muscular 7.3% year-over-year growth, Trading Economics reports. That would be up from 4.5% in Q1, the strongest quarterly GDP growth since a year earlier.

China’s reopening has been slower than many economists expected, but Q1 GDP growth beat estimates on strong retail and industrial output. Sunday’s report could either reinforce ideas that such growth continued, or that recovery has started to lag. A weak result would probably weigh on crude oil prices, with Saudi Arabia’s recent production cuts likely reflecting lighter Chinese demand.

What’s next for Treasuries? Yields on short-term U.S. Treasury notes recently hit 5% before this week’s inflation data led them to nose-dive. Where might yields go if the economy hits a rough patch? Read about that and more in the latest analysis from Schwab’s Chief Fixed Income Strategist Kathy Jones.

DXY Daily Chart

CHART OF THE DAY: GREEN TURNS RED. This week’s lighter-than-expected U.S. inflation data helped push the U.S. Dollar Index ($DXY—candlesticks) below 100 for the first time since April 2022 (red line) by reducing fears of additional Fed rate hikes after this month’s projected 25-basis-point increase. Gold (/GC—purple line) moved up as the dollar declined, as is often seen in this relationship. Data sources: ICE (NYSE:), CME Group (NASDAQ:).

Thinking cap

Ideas to mull as you trade or invest

Earnings bar falls: Despite stellar results from Delta Airlines (NYSE:), shares of Delta and other airlines lost altitude Thursday in what might have been “buy the rumor, sell the fact” action following a long run-up in the sector. Don’t be surprised if this becomes a common theme. Analysts pencil in extremely light estimates for Q2 earnings results, with S&P 500 earnings per share (EPS) seen falling more than 7% according to FactSet. This means the bar is low to beating Wall Street’s forecasts, and companies might not get rewarded for doing so. It might be akin to a “participation trophy.” Instead, companies could find themselves expected to not only beat average analyst estimates but also any higher “whisper numbers” floating around. If a company surpasses estimates and its stock falls, maybe its earnings didn’t deliver whatever secret sauce influential investors had hoped to see. Consider focusing on revenue. It’s harder for companies to keep sales rising in a less inflationary environment, and those that do might be rewarded.

Bye Bye Bullard: Yesterday’s surprise announcement that St. Louis Fed President James Bullard is stepping down after 15 years means the FOMC loses a notable hawk. Bullard was in a lonely perch during much of his time as rates remained near zero. These days, with the FOMC voting unanimously over the last 16 months to raise the benchmark rate by a cumulative 500 basis points, it’s possible his departure won’t represent as monumental a change as it might have, say, two or three years ago. It appears everyone’s a hawk now.

FOMO: Some of Wall Street’s recent strength goes beyond bullish data and earnings, reflecting investors’ “fear of missing out” , or FOMO, on the long rally. Sentiment metrics are elevated, indicating an above-normal percentage of investors feeling positive about the future, and more than 84% of S&P 500 stocks trading above their 50-day moving averages. Sentiment looks a bit “frothy,” says Schwab Chief Investment Strategist Liz Ann Sonders, which itself is a risk. That doesn’t mean people shouldn’t put their money to work, of course, but anyone who does should perhaps consider sector diversification and possibly dollar-cost averaging. Also, if you’ve been in the market awhile, check your portfolio. The rally may have you more exposed to stocks than you’d planned, and you might want to adjust.


July 17: July Empire State Manufacturing

July 18: June Retail Sales and expected earnings from Bank of America (NYSE:), Morgan Stanley (NYSE:), Lockheed Martin (NYSE:), and PNC (PNC)

July 19: June Housing Starts and Building Permits, and expected earnings from Goldman Sachs (NYSE:), Netflix (NFLX), First Horizon (NYSE:), Haliburton (HAL), and U.S. Bancorp (USB)

July 20: June Existing Home Sales, June Leading Indicators, and expected earnings from Abbott Labs (NYSE:), American Airlines (AAL), Philip Morris (PM), Johnson & Johnson (JNJ), D.R. Horton (DHI), Freeport McMoran (FCX), Travelers (NYSE:), and CSX (CSX)

July 21: Expected earnings from American Express (AXP), AutoNation (NYSE:), and Regions Financial (NYSE:)

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

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