While Morgan Stanley and JP Morgan released dismal numbers last week, the momentum has changed slightly for the largest US banks and the investment banking industry in general. Goldman Sachs beat second-quarter earnings expectations and set the tone for a potentially bullish week for bank stocks.
The report also raised expectations that the Federal Reserve may not be as aggressive as initially thought with interest rates, potentially opting for a rate hike of 0.75% instead of 1%. The unlikely catalyst for Goldman Sachs was fixed income traders, beating expectations by more than $600 million, driving bank stocks higher.
Bank of America also raised investor optimism in the banking sector with better-than-expected earnings, but for a different reason. The bank was able to capitalize on higher interest rates, for example.
While markets will likely continue to be volatile in the final two weeks of July, some institutional investors seem hopeful that the potential for a soft landing is at least one possible scenario. The earnings reports stand in stark contrast to their two big counterparts released last week.
To see where the banking sector as a whole is holding up, analysts will need to look at the earnings of mid-sized banks rather than those of large banks, especially for the retail banking sector. The 3-4% rebound that Goldman Sachs and Bank of America received after earnings reports is almost the exact contrast to the decline of Morgan Stanley and JP Morgan.
Banking stock valuations are low for the year, but analysts still note stronger cash positions than in previous volatile economic cycles.