Here’s Why Big Bank Stocks Like JPMorgan Are Struggling Despite Solid Earnings

Shares of several major banks tanked on Friday—even after reporting solid quarterly earnings—as reports underwhelmed investors and some firms warned about rising expenses and “inflationary pressures,” which could impact future profits.

Key Facts

Key Background:

Bank stocks have outperformed in recent weeks amid a rising interest rate environment, with many analysts predicting upside ahead in 2022. Rising rates typically allow banks to charge more for loans and produce higher yields on cash holdings, which helps boost profit margins. While headline revenue and profit numbers reported by some major banks on Friday were by no means weak, the reports appear to have underwhelmed Wall Street with investors possibly expecting more.

Crucial Quote:

“The big thing that stands out to us is expenses,” says Vital Knowledge founder Adam Crisafulli, predicting that it is “likely to be a theme over the coming weeks as additional Q4 results get reported.” JPMorgan’s rising expense guidance, in particular, is the “most important piece of macro news all week” because it signals the rising risks of both wage inflation and corporate margin headwinds, he says.

Surprising Fact:

Wells Fargo was one of the top-performing bank stocks last year, surging 59% and beating out the likes of JPMorgan Chase and Bank of America, which rose around 25% and 47% in 2021, respectively.

The Fed (Powell) says the economy is strong and has signaled several rate hikes beginning in March. The data (and the Fed’s own Beige Book) say otherwise. But this politicized Fed appears to have no choice as the Administration’s poll ratings are at record lows, much of it due to inflation. Unfortunately, the tools that the Fed has are inappropriate to fight a supply induced inflation. The ultimate consequences of their actions could possibly lead to a continuation of today’s high inflation levels.

The Headwinds

For the past two months, this blog worried that the “shortages” narrative had pulled holiday sales forward into October (+1.8%) and November (+0.3%) and that December sales would “disappoint.” That proved prescient.

Retail Sales fell in December by a non-trivial -1.9%. Non-store sales (read: Amazon) fell by a hard to believe -8.7% which gives credence to our hypothesis that demand was “pulled-forward.” For most of December, omicron wasn’t much of a concern. After-all, it was milder than delta and there were only a few cases.

Then the country got together for the holidays, and now omicron is everywhere. Surely, January’s consumer data will be weaker. As for businesses, the tsunami of absenteeism is sure to have negative growth impacts. Into this mess, the Fed has pledged to tighten policy – surely a mistake!

The tailwinds that have propelled the economy (and caused the inflation) are gone:

• The three rounds of “Helicopter Money” from the IRS ended last spring;
• For those states that opted-in, Supplemental $300/week Unemployment Benefits ended in September;
• The expanded child tax credits (for 2021 only) ended in December; no longer will families be receiving $300+/month for each child in their household under 18 years of age;
• Eviction moratoriums and rent deferrals have ended, meaning rent payments (and likely some back rent) must now be made out of current income which will no longer be available for consumption;
• While student loan payments continue to be deferred (until April 30), unless extended again, payments will soon be required; again, removing cash from the consumption stream;
• Market interest rates have risen in anticipation of pre-announced Fed rate hikes. As a result, mortgage interest rates are rising. This will negatively impact mortgage applications which will slow the housing market and reduce growth (the “good” effect here is that home prices may stop rising).

The economic data has yet to reveal the full impact of the omicron variant:

· When the December employment surveys were taken (week of December 12-18), omicron wasn’t a big factor. Even so, December’s employment report was much weaker than expected. Omicron is sure to have a negative impact on the January employment surveys taken this past week (January 9-15).

We have already seen large spikes in the Initial Unemployment Claims (ICs), shown on the right-hand side of the chart. There are also spikes in the Continuing Claims data.