Why bank profits are driving the current rally
Stocks traded higher today as bank profits continue to impress. This time it was Goldman Sachs that had a booming quarter thanks to the company’s massive trading gains. All three major indices opened higher that day in response.
“Banks have painted a strong and healthy image of the American consumer,” said Edward Moya, senior market analyst in Oanda.
“Wall Street cannot turn negative about the economy after seeing reserve releases, moderation in trading income, mixed loan growth, and a consumer ready for debt.”
It is much easier to get into debt when rates are close to their historic lows. The 10-year Treasury yield climbed to 1.57% (+ 3.62%) today, limiting growth-hungry technological gains. But the 10-year rate is still significantly lower than its longer-term performance.
The latest University of Michigan consumer sentiment survey also hurt bulls slightly this morning, when it revealed a large “stagflationary” boost. Inflation expectations have reached their highest level since 2008, as the index of current economic conditions approached its initial Covid low.
With a score of 77.9, it is the second lowest value in the current economic conditions index since 2011.
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“When asked to describe in their own words why conditions were unfavorable, net price increases were cited more frequently than ever since inflation peaked at over 10% in 1978-80,” said said Richard Curtin, longtime director of the investigation.
Surprisingly, however, September’s retail sales data (also released this morning) showed a major “beat”. Retail sales rose 0.7% last month, well above the consensus estimate of -0.2%.
“The inflation environment and supply chain concerns have not taken a heavy toll on retail sales,” noted Yung-Yu Ma, BMO Wealth Management.
“Consumers are acclimating to higher prices. So far, this has not resulted in a significant drop in demand. But this willingness to absorb higher prices is not unlimited.
In other words, the decline in consumer confidence has yet to impact retail sales. But that doesn’t mean it won’t in the near future as the holiday season approaches. October’s retail sales data will be critical in determining the path of the economy as Thanksgiving and Christmas approach.
Most analysts believe that a strong earnings season will prevent another massive selloff from happening this year. Natixis Investment Managers’ portfolio manager Jack Janasiewicz believes this is not only due to a strong earnings crop, but also to the fact that quarterly estimates have been reduced significantly in anticipation of a slow Q3.
“We have had a number of Wall Street strategists who have called for a correction. If you look at things like surprise clues they all tend to go down […] earnings estimates for the third and fourth quarters have stabilized, ”Janasiewicz said.
“To me it looks like a downtrend in the market. And when we start to think about the purchasing power that might come back when everyone starts to turn positive – profits might be that catalyst, [and] we could definitely see that benefit.
So, will stocks hit new highs in the coming weeks? It certainly looks like they could, aided by analysts who lowered their quarterly estimates to produce bigger earnings “beats”.
Even if the reality of the earnings picture is much less optimistic than these “surprise reports” would lead investors to believe.