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Big Banks Report Earnings This Week, They Could Determine Where the Market Is Heading

Big Banks

Investors worried about a recession will be scrutinizing the earnings reports that are expected to hit this Thursday from some of the top banks in the nation.

Concerns about upcoming economic gloom have already driven a significant market sell-off

Last month JPMorgan CEO Jamie Dimon said that his company is preparing for a “non-benign environment” and “bad outcomes” and warned investors to brace themselves for an impending economic “hurricane.” 

Second-quarter profits at big U.S. banks are expected to fall dramatically from last year on increased loan loss reserves, as many see us heading into a possible recession.

We no longer have a Fed providing liquidity.

The Federal Reserve is likely to raise rates by three-quarters of a percentage point at the end of the month, but quantitative tightening is now draining liquidity, and no one has any clue how many rate hikes may follow. It’s expected that central banks worldwide will drain roughly $4 trillion by the end of next year.

Odeon Capital Group analyst Dick Bove wrote in a client note on July 1 that the Federal Reserve’s moves to raise interest rates and slow the growth of the U.S. money supply made it clear the central bank was “moving forward to meet its promise to reduce inflation.” He wrote that it was “very difficult, if not impossible,” to predict a bottom for bank stocks.

He suggested buying on weakness for two reasons:

  • “The deglobalization of the world economy will result in a major increase in business activities that require bank lending.”
  • “The valuations on bank stocks tend to reflect the potential of a recession, not the possibility of a strong surge in economic activity coming out of that recession (should it occur).”

Some see rate hikes as a positive…

“Main Street banking has been incredibly pressured for the past decade due to zero interest rates during most of that time. So now it’s finally going back directionally to a more normal interest rate environment compared to the last decade,” said Mike Mayo, banking analyst at Wells Fargo. 

Mayo forecasts that the growth rate in net interest income from 2022 to 2024 will be the highest since the 1980s as the Fed continues to lift rates this year to combat inflation. According to Fed data, demand for loans is also on the rise, especially in commercial and industrial lending and credit card loans.

But what about Mortgage Layoffs?

As we reported last week, there is a significant concern in the mortgage market as some top lenders have started another round of layoffs.

“Over the next month or two, we’ll see the bulk of layoffs,” said Doug Duncan, chief economist at Fannie Mae, which, along with Freddie Mac, backs many U.S. mortgages. “There is usually about a six-month lag between a turn in the market and layoffs.”

Fannie Mae economists predict that total home sales will fall by 13.5 percent this year and that mortgage originations will decline by nearly 42 percent to US$2.6-trillion.

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