Earnings Watch: Banks gain favor in risk-off environment but earnings uncertainty remains

by | Jan 9, 2023 | Stock Market

J.P.Morgan Chase & Co., Wells Fargo Co., Citigroup Inc. and Bank of America Corp. will kick off fourth-quarter bank earnings reporting season next Friday as the banks face a choppy economic environment. Goldman Sachs Group Inc.
and Morgan Stanley
are both expected to to report their results for the three months ended Dec. 31 on Jan. 17.

While rising interest rates have allowed banks to generate more net interest income from loans, fears of economic slowdown have been weighing on the sector as it gets more expensive to borrow money and fewer transactions such as home mortgages get done. Loan growth is expected to slow, while investment banking remains moribund as initial public offerings and other financing deals cool off. Goldman Sachs and Morgan Stanley are expected to cut staff after Wells Fargo
was the only bank in the third quarter to report a headcount reduction amid a drop in its mortgage business. Also Read: Goldman sharpens knife on headcount, bonuses along with other big banks At the same time, banks may divert some income away from the bottom line to build up capital reserves to withstand an economic downturn. Stock buybacks and dividends may be more muted as a result. The profit parade from the U.S.’s largest banks will come after their stock prices underperformed the overall market as investors wait for a pause in interest rate hikes by the Federal Reserve. “It’s tempting to get more positive given stocks are already down sharply, inflation seems to be slowing and Fed rate hikes may be coming to an end,” Deutsche Bank analyst Matt O’Connor said in a research note on Friday. “But our gut is that stocks will set new lows and fully (or close to it) price in a U.S. recession suggesting there’s more risk from here.” Also Read: Wells Fargo has fired an executive accused of urinating on a fellow passenger aboard a flight to New Delhi During the fourth quarter, digital currency loomed large on Wall Street’s radar screen in the wake of the bankruptcy of crypto exchange FTX. Banks are positioning themselves as providers of regulated banking services and specialists in more stable, government-backed currencies. J.P.Morgan Chase
CEO Jamie Dimon has been front and center on this issue and has referred to cryptocurrencies as “pet …

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