The Dow Jones Industrial Average sustained its bullish momentum Tuesday, buoyed by the release of stronger-than-anticipated earnings from top financial and banking stocks. The blue-chip index accrued an additional 360 points, or 1.1%, riding the wave of a near 5% surge in Verizon. The S&P 500 also rose by 0.4%, while the tech-heavy Nasdaq Composite modestly retreated by 0.2%. This uptick marked the Dow’s seventh consecutive day of gains.
Outperforming market expectations, Bank of America’s second-quarter earnings reaped the benefits of higher interest rates, leading to a 4.3% gain for its stock. Bank of New York Mellon followed suit, with shares climbing 2.1% in the wake of better-than-expected earnings.
Morgan Stanley’s stock price saw a 6% bump following a successful quarter in which both revenue and adjusted earnings per share beat estimates, thanks to record revenue from its wealth management segment. However, the firm reported a 13% drop in profit to $2.18 billion or $1.24 per share due to weaker trading outcomes compared to the previous year and a $308 million severance bill from recent layoffs. Meanwhile, revenue rose 2% to $13.46 billion.
Morgan Stanley’s CEO, James Gorman, has led the company towards a focus on wealth management since his appointment in 2010, resulting in steady earnings and an elevated market valuation. Gorman, who announced his plans to step down within the year back in May, noted in the earnings release, “The firm delivered solid results in a challenging market environment.”
Despite lower market levels leading to a slight dip in fees compared to the previous year, the wealth management segment’s Q2 revenue rose 16% to $6.66 billion on higher interest income, outpacing the $6.5 billion analysts’ estimate. The sector also raked in $90 billion in net new client assets.
The performance of the bank’s Wall Street division was less rosy, posting an 8% drop in revenue to $5.65 billion, primarily due to declines in trading. While equities trading revenue exceeded estimates at $2.55 billion, the fixed income segment underperformed with $1.72 billion, falling short of the $1.99 billion estimate.
Gorman confirmed during a conference call that the bank’s board is evaluating three internal CEO candidates. He will remain as executive chairman following the promotion of his successor.
He also commented on the industry-wide turmoil brought on by interest rate hikes, stating, “While we may not be quite at the end of rate increases, I believe we are very, very close to it.”
Morgan Stanley’s stock has seen a slight increase this year, defying the roughly 20% decline of the KBW Bank Index.
Last Friday, JPMorgan Chase, Citigroup, and Wells Fargo all outperformed analysts’ expectations amidst higher interest rates. Goldman Sachs is set to close the earnings of big banks on Wednesday.
Despite tepid retail sales data from the Commerce Department released on Tuesday, investors remain optimistic. David Russell, Vice President of Market Intelligence at TradeStation, commented, “This is modestly positive news for investors worried about the Fed needing to hike after July. Goldilocks marches on.” The report showed advance retail sales had a slight 0.2% increase in June, compared to the forecasted 0.5% rise.
This earnings season commences as recent inflation data reinforces the prospects of a soft-landing scenario for many investors, leading stocks to extend their rally this year. And, as our hypothesis continues to be true – 82% of S&P companies that reported thus far have beat their very low earnings estimates – the prospects of a continued rally look quite good, even as the market approaches another rate hike next week.
