A “Rough Year” for Banks Is on Its Way

Stocks ticked slightly higher today as tech continued to drive marketwide gains, even with investors remaining focused on the upcoming inflation data. The Dow edged up about 0.2%, matched by a similar increase in the S&P while the Nasdaq Composite experienced a modest rise of about 0.3%. This performance comes after tech stocks were the only major index to show gains yesterday.

Investors are exercising caution ahead of December’s Consumer Price Index reading, which will be crucial in assessing the likelihood of the Federal Reserve altering its policy stance. The market’s confidence in early rate cuts in 2024 has waned recently, increasing the stakes for the upcoming inflation data.

In the cryptocurrency space, Bitcoin fluctuated but managed to stay above the $45,000 mark following a tweet from the SEC’s account, which was later attributed to a hack. The false post had announced the approval of spot bitcoin ETFs, a decision expected later today.

The market’s focus is also shifting toward the start of the fourth-quarter earnings season, led by financial giants such as JPMorgan Chase, set to report on Friday. This earnings season is pivotal for the stock market, which has had a rough start to the year. Simply put, corporations need to provide solid numbers, otherwise, recession fears may start to override rate cut hopes.

JPMorgan Chase is projected to announce record annual profits of $49 billion for 2023, according to analyst estimates, potentially marking the best performance in the industry’s history. This would represent a significant improvement over its 2022 bottom line. The bank’s performance is expected to surpass its rivals substantially, according to Bloomberg’s analyst estimates.

Despite JPMorgan’s anticipated success, the banking sector faces a challenging period, one of the most difficult since the 2008 financial crisis. JPMorgan’s fourth-quarter profits are likely to be lower than the previous year, and estimates for 2024 suggest a decrease in profits to $45 billion.

The banking industry is grappling with various challenges, including pressure on loan margins, rising loan delinquencies, a slowdown in dealmaking, and increasing regulatory demands. JPMorgan, like other banks, also won’t benefit from the boost it received in 2023 from acquiring First Republic.

In addition to JPMorgan, other major banks will also feel the impact of FDIC assessments related to the 2023 failures of Silicon Valley Bank and Signature Bank. Citigroup, Wells Fargo, and Bank of America are also expected to report their fourth-quarter earnings, with each facing its unique set of challenges.

Investment banking, which experienced its worst year in a decade, is another area of concern, particularly for Goldman Sachs and Morgan Stanley, who are expected to report a decrease in investment banking revenue.

Bank stocks had rallied in the last part of 2023, fueled by hopes of Fed rate cuts in 2024. However, smaller banks continue to face high deposit costs without significant growth in loan portfolios as credit losses increase. The banking industry’s loan losses have risen for eight consecutive quarters, with the four largest banks projected to have nearly $19 billion in bad loan write-offs for 2023.

Looking ahead, 2024 is anticipated to be a challenging year for earnings growth in the banking sector, setting the stage for a potential recovery in 2025. If the Big Banks hint at this on Friday, this could knock bulls down a peg or two regardless of how tomorrow’s inflation data looks.


Please enter your comment!
Please enter your name here