For the largest banks, revenue spiked the previous quarter from high IPO activity. So focus on year-over-year improvements. The big banks will kick off third-quarter earnings season on Tuesday, as investors have been eagerly awaiting the first look at how the recent surge in Treasury yields and oil prices, as well as uncertainties about the outlook for the economy, may have the affected the behavior of companies and consumers.
The financial sector, and bank stocks in particular, are viewed by many as a leading indicator of the health of broader stock market. That’s because banks provide the fuel for growth in the economy in the form of financing and loans — companies need to borrow so they can grow their businesses, and consumers need to borrow to make larger purchases, such as homes and cars. Investors have been expressing concerns that generational highs in longer-term interest rates and sky-high prices at the pump have curtailed companies’ and consumers’ appetite for taking on new debt, which means less business for banks.
It didn’t help that executives at some banks, including Bank of America , said that company dealmaking had slowed in the latest quarter, while the latest economic data on how consumers are feeling have come in below expectations. The Invesco Bank ETF had soared more than 18% in three months to reach a record high on Aug. 14, but it has tumbled more than 12% since then. Meanwhile the S&P 500 index has edged slightly higher since Aug. 14.
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Christoner Marinac, the director of research at Brean Capital, which provides investment-banking services for small- and middle-market banks, said that the recent decline in bank stocks resulted from the market “pricing in higher interest rates that had been ignored in prior months.” But there is a bright side. Despite the all the macro worries, the largest of the big banks, JPMorgan Chase , previewed its quarterly report by saying in mid-September that the U.S. economy and consumers were strong, credit was good, company management teams were confident and deal activity was robust. Investors will get an even clearer picture when JPMorgan, Citigroup , Wells Fargo and Goldman Sachs all announce their third-quarter results on Tuesday.
Bank of America and Morgan Stanley will follow with their reports on Wednesday. Marinac told MarketWatch that “to some extent, the market does worry about a recession,” and that after a strong three months for stock prices (before August), “a cooling-off was warranted.” ”Now [during earnings season] people will focus on the fundamentals, which are still pretty good ,” Marinac said. The third-quarter numbers will include sharp declines in investment-banking income from the second quarter, when all six of the largest U.S. banks participated in SpaceX’s record initial public offering in June.
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