CNBC Daily Open: Don't be misled by the big banks
The earnings reports were good, but investors are worried that they won't be able to sustain the good results.
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Three major U.S. financial institutions reported earnings for the first quarter that were better than expected. Investors realized that this was not a clear-cut positive sign for the markets.
What you should know today
JPMorgan Chase reported its earnings on Friday. All three major U.S. Banks easily beat revenue and profit expectations. JPMorgan had the best numbers, with a 52% increase in profit for the first quarter.
Jamie Dimon warned that while JPMorgan's performance was spectacular, the U.S. economic situation is still unstable. Dimon warned that people should be prepared to face higher interest rates for a longer period of time, which could lead to more bank failures.
Analysts and economists worry that, despite bank failures, Europe's commercial property market could be next to collapse due to higher interest rates. Citi believes that European real estate stock prices could drop between 20-40% between now and the year 2024.
The U.S. market fell on Friday, as the stellar earnings of banks were overshadowed by weak retail sales. European banking stocks, on the other hand, rose by 3%. This helped to boost the pan-European Stoxx600 index to a new 52 week high.
Scott Schnipper, CNBC Pro, says that earnings reports will have the biggest impact on markets this week. One important tip for investors: Don't assume that all numbers better than expected are good, just because the earnings forecasts were negative so long.
Bottom line
The incredible earnings of the big banks did not mislead investors.
All three banks reported higher profits and revenues compared to a year ago. JPMorgan announced a record revenue, $39.34 billion. This is a 25% increase that exceeded analysts' estimates by over $3 billion. Wells Fargo reported a 17% increase in revenue, while Citi posted a 12% rise.
Investors rewarded banks with sterling balance sheets. JPMorgan rose 7.55% while Citi gained 4.78%. Wells Fargo, however, fell 0.05%. Not because its numbers are bad, but I suspect because it did not beat Wall Street's expectations as much.
Why was the data so good? The rising interest rates that allow banks to charge higher interest rates on loans while maintaining low interest savings accounts. Net interest income is what banks keep. Banks will continue to benefit from the high-interest rate environment. JPMorgan has predicted that net interest income for this year will be $7 billion higher than what they had originally forecast.
High interest rates can be a double-edged blade. As Dimon himself has warned, even though higher interest rates have boosted the earnings of big banks, they expose weaknesses in their balance sheets. Dimon himself warned that, without the financial strength of larger banks to cushion potential losses, regional banks might not be able to report such positive news when they announce their earnings next week.
What's good to the big banks isn't necessarily good to the economy. In fact, the data released on Friday indicated that the economy was slowing down. According to an advance reading, retail sales declined by 1% in March, which is two times higher than what economists expected. Citigroup CEO Jane Fraser stated on an investor conference call that she saw "a notable softening" of consumer spending in this year.
Investors remained calm despite the excitement surrounding the earnings of the major banks, and the three major indexes fell. The S&P 500 fell by 0.21%. The Dow Jones Industrial Index dropped by 0.42%. And the Nasdaq Composite was down 0.35%.
Investors will get a better sense of the markets if they see more earnings in this week.
Watch out for these key reports: Charles Schwab, Bank of America, Goldman Sachs, and Netflix, on Monday. Morgan Stanley, IBM, and Tesla, on Wednesday. American Express, on Thursday. Procter & Gamble, on Friday. Investors should know by the end of the week if the disconnect is only affecting big banks, or if this is a side effect of our strange times.