Monday Takeaways: Bank on Trouble Coming

Shah Gilani|July 15, 2024

The market was practically giddy last week as we got ready for earnings season to kick off.

The S&P 500 surged past 5,600… blowing past most expectations.

But the latest bank earnings reports tell us there are some cracks in the foundations.

And those cracks have to do with the American consumer.

See what’s going on… plus find out whether the market’s up against an inflection point… all in today’s Monday Takeaways.

Click on the thumbnail below to watch.

Transcript

Good morning, all. Shah Gilani coming to you this Monday with your takeaways.

First off, last week, another record day on Wall Street Friday.

S&P 500 north of 5,600.

There’s no stopping the S&P. The Nasdaq composite, not so much at the end of the week because, well, there’s this thought that maybe tech is taking a rest and maybe we’re going to see some rotation into mid caps and maybe small caps and value, and well, that remains to be seen, but tech didn’t do great at the end of the week last week. But the S&P certainly did. We are setting record after record in the S&P 500.

So you gotta love that. 5,615. Alright? Most analysts that had boosted their numbers earlier, 5,600 was pretty much the top, and now we’re over 5,600 and 5,615 on the S&P.

Takeaway from there is the market has momentum.

Let’s see if it can continue. Friday was a good day for the S&P. It was a good day for stocks in general for the most part because CPI was encouraging. The consumer price index declined in June from May 0.1%, turning the annualized growth of inflation to 3% annually, down from 3.3% in May.

And that was encouraging. It was encouraging because, yes, you guessed it, the Fed will likely be able to cut if inflation is indeed working its way back down. We know the Fed wants to cut, just a matter of when they cut and maybe how often this year. I think they’ll cut in September before the election, but the betting on that seems to be increasing.

So perhaps that’s what the market wants to see. Well, we know it wants to see that. Perhaps that’s what it’s betting on itself.

That all being said, CPI, as good as it was, isn’t the best thing because if prices are slowing, if the inability for companies to pass along higher prices, is starting to weigh on consumers, and consumers are pushing back and therefore maybe not spending on some of those higher priced items. And so does that mean that companies are going to have to start to reducing prices somewhat? Does that mean that their profit margins will get crimped?

So going forward, we’re going to keep an eye on that. So CPI, kind of a double-edged sword. Certainly a positive in sense that the Fed will likely cut at some point this year. Maybe a bit of a negative if it continues to drop.

If it drops quickly and precipitously, that’s taking away some of the firepower that companies have to raise their prices to increase their revenues, fatten up their profit margins. That could turn the other way. So that’s a takeaway from CPI. It’s a double-edged sword right now.

Last week, we had three big banks report on Friday. A lot of takeaways in there, people. We had JPMorgan Chase, Wells Fargo, and Citi.

Now for the most part, they beat expectations, which had been tapped out. But looking through the numbers, the takeaway that I have for you is not so great. What I’ve been talking about and warning everyone to look at, look through the headline numbers, which otherwise you would say, oh, they beat.

Look through the loan books. See what’s happening in the loan books. Look through it with their net interest margin. Look through with what’s going on with loan loss set asides.

Those were all not good. And though they beat, the stocks got beaten up a little, but Wells Fargo got pounded on Friday 6% because though they beat expectations, their profits were down.

The lookthrough that is concerning speaks to consumers. So if banks are setting aside more loan loss reserves against future writedowns on loans, that’s a warning that consumers are starting to maybe not pay their loans in a timely manner, and they’re having to write some off. And they did write a bunch off. But the set asides for the future losses is what’s concerning.

That speaks to where the consumers are. Loan books themselves didn’t grow. In fact, a couple banks saw declining loan books. So they’re not only not making more loans, they’re making fewer loans.

And those loans in the future, they’re getting worried about being repaid.

We’re starting to perhaps see the cracks. The first cracks in consumers’ spending, in consumers’ ability to handle higher prices and borrow to do it. That’s the takeaway, people. Wasn’t great.

Goldman Sachs, another story this morning, hit it out of the park with really terrific profits up, like, 150% year over year. So, Goldman Sachs, the exception right now. But as far as the banks on Friday, takeaway there is, people, this is now, I think, the beginning of what could be a turn for consumers.

That’s going to be worth watching for sure. The last thing I want to give you on the takeaways is this week is going to be important to see whether or not the momentum from last week and S&P making another new high can continue. The futures this morning are up nicely, but it’s going to be a long week. A lot of earnings coming out. This is the season, people, and it’s a very important earnings season. So we just got underway, and investors are going to hang on every earnings report. The market’s going to hang on most earnings reports.

I’m not so sure that the next couple of weeks, if we don’t see tech gather itself back up and continue to try and lead and it’s starting to look a little tired that whole sector, just a little tired because it’s had such a run. If we don’t see them gather themselves up and help move the market higher, if we don’t see the rotation that everyone’s hoping for, then the market could drift lower. And we could have an accident somewhere along the line in the next few weeks. So takeaway here is, yeah, everything was good last week, except that it wasn’t maybe great under the covers as far as the banks.

And the takeaway from all that is we are coming, I think, close to some kind of inflection point for the market. So make sure you have your stops in place. Make sure you got your plans on what to do with your capital. If we do see a bit of a downturn, there are plenty of stocks that are going to go on sale.

If that happens, I’m not saying it is going to, I’m saying it looks like it’s shaping up to perhaps go that direction.

When? Not sure. If I knew the timing, I would tell you. That’s it for today’s takeaways. I’ll catch you all next week. Cheers.