To The Moon

illustration showing signages of bank of america, jpmorgan chase, wells fargo, citi and goldman sachs

As we enter 2025, the much-anticipated earnings season for major banks is underway, with market analysts predicting robust performance across the sector. Institutions like Goldman Sachs, J.P. Morgan, Citigroup, Bank of America, and Morgan Stanley are poised to report impressive year-over-year growth in both revenue and EPS. Given this backdrop, the big question arises: can these earnings reports provide the much-needed boost to the current market, especially as it grapples with rising 10-year Treasury yields, a surging dollar index, and consecutive stock market declines?

Expected Q4 Performance of Major Banks

The following table highlights the anticipated earnings and revenue growth for major U.S. banks:

This impressive forecast reflects strong net interest income (NII) growth fueled by elevated interest rates and solid trading and investment banking activity in specific cases.

Can Big Bank Earnings Propel the Market?

• Macroeconomic Headwinds

Despite the positive earnings outlook, macroeconomic conditions present significant challenges. The 10-year Treasury yield has climbed to multi-year highs, increasing borrowing costs and raising concerns about economic growth. Simultaneously, the dollar index’s ascent has put pressure on multinational corporations by making U.S. exports less competitive globally. These factors have contributed to a series of stock market declines in recent weeks.

• Historical Impact of Big Bank Earnings

Historically, robust earnings from big banks have often acted as a bellwether for market performance, especially at the start of an earnings season. During periods of economic uncertainty, strong bank earnings can instil confidence in the financial system, leading to broader market gains. However, the context matters: in an environment of rising yields and a strong dollar, the positive impact of bank earnings may be muted or even overshadowed by macroeconomic fears.

• Sector Rotation and Investor Sentiment

Investors may view strong bank earnings as a signal to rotate into financial stocks, which tend to benefit from higher interest rates. However, this could come at the expense of growth-oriented sectors such as technology, which are more sensitive to rising borrowing costs. The overall market impact will depend on whether the positive sentiment surrounding banks outweighs broader concerns about the economic outlook.

Historical Impact on the Stock Market:

Historically, big bank earnings have had varied impacts on the stock market:

• Positive Market Boost: Strong bank earnings often signal economic health, encouraging investment in equities. For instance, during periods like the post-2008 recovery, strong banking sector earnings were pivotal in market rallies.

• Sector-Specific Influence: When banks report strong earnings, it's not just the financial sector that benefits; the ripple effect can lead to gains in related sectors like real estate or technology due to increased lending and consumer confidence.

• Market Sentiment: Earnings seasons where banks outperform expectations can shift market sentiment, especially if they indicate better-than-expected economic conditions or lower anticipated default rates.

• Yield Curve Considerations: The relationship between bank earnings and Treasury yields is complex. While banks might benefit from higher yields, an inverted yield curve (where short-term yields exceed long-term yields) often signals economic downturns, which could negate some positive earnings effects.

• Volatility and Recovery: After significant market declines, strong earnings can lead to volatility as investors decide whether it's a turnaround signal or a temporary bounce. The 2020 market recovery saw banking earnings playing a crucial role in regaining investor confidence.

What to Watch

• Guidance on NII and Loan Demand: Investors will closely monitor management’s guidance on net interest income and loan demand. A cautious outlook could dampen enthusiasm despite strong Q4 results.

• Credit Quality: Any signs of deteriorating credit quality, such as higher delinquency rates or increased loan-loss provisions, could raise red flags.

• Broader Economic Indicators: The trajectory of Treasury yields and the dollar index will play a critical role in shaping market sentiment, regardless of bank earnings.

Conclusion

While the Q4 earnings reports of big banks are expected to shine, their ability to provide a significant boost to the stock market remains uncertain. The challenging macroeconomic environment, characterized by climbing Treasury yields and a strong dollar, may limit the broader market’s ability to capitalize on strong bank earnings. However, for financial stocks, these earnings could catalyze outperformance.

Ultimately, the overall impact will hinge on the balance between robust bank earnings and the persistent headwinds facing the market. Investors should remain vigilant, focusing on key guidance metrics and the evolving macroeconomic landscape as earnings season progresses.