Banks Lead Parade with Strong Earnings Amid Inflation Fireworks as Powell Awaited

Banks Lead Parade with Strong Earnings Amid Inflation Fireworks as Powell Awaited

When you think of Bastille Day, maybe parades and fireworks come to mind. On Wall Street today, we get a parade of fresh earnings reports, another look at inflation, and a few words from Fed Chairman Jerome Powell. Any fireworks? We’ll see.

After a strong start to earnings season Tuesday as big banks saw their investment banking businesses drive strength, the second day has a lot to live up to. So far, it’s looking mostly good. The banks have more than held up their end of the bargain, if you will.

Bank of America (NYSE:) shares kicked off Wednesday with a bit of a disappointment. Shares fell in pre-market trading after the company just missed analysts’ average revenue estimate as net-interest income got clipped by weak rates.

Citigroup (NYSE:) was a happier story, with the company beating Wall Street’s earnings and revenue estimates. Wells Fargo (NYSE:) had a nice revenue beat, which was a bit surprising and seemed to give shares an early boost. And Blackrock (NYSE:) also looked strong, beating estimates and showing an impressive level of assets under management.

It’s nice to see how C worded it when it comes to trading volume coming down from the frenzied levels of the COVID peak. Revenue fell, the company said, but it’s “primarily reflecting normalization in market activity.” Although trading did well, the standard of the previous quarter was unattainable. Nobody else said it so simply.

Over across the aisle, Delta Air Lines (NYSE:) shares took off before the bell after the company surprised most of Wall Street by reporting a profit in when the average analyst projection had been for another loss. Domestic leisure travel “is fully recovered to 2019 levels,” DAL said in its press release, adding that business and international travel also showed “encouraging signs of improvement.”

In non-earnings company news, shares of Apple (NASDAQ:) surged 2% ahead of the open after a media report said the company asked suppliers to prepare for a 20% increase in iPhone shipments. That could imply heavier demand shaping up.

With the earnings picture mostly strong and Treasury yields relatively flat, the major indices moved just a bit higher in pre-market trading Wednesday. A lot of the bounce could be related to the banks. dipped a little on questions about Chinese demand and reports of a possible OPEC deal.

Things could be a bit slower than usual ahead of Fed Chairman Jerome Powell’s economic testimony to Congress. The market often trades a bit more thinly when people await his words. With congressional testimony, it’s all about the questions. Powell’s prepared remarks showed no rush to get out of easy money policy.

One thing he’s almost certain to get asked about is today’s June producer prices index (PPI). Both headline and core PPI rose 1% month-over-month in June, far above analysts’ average estimate of 0.5%. That comes one day after consumer prices rose the most in almost 30 years.

Can’t Please ’Em All

Continuing a tradition from Q1, shares of JP Morgan Chase (NYSE:) and Goldman Sachs (NYSE:) both declined about 1% yesterday after strong earnings. BLK is down today despite an earnings beat. This could reflect “buy the rumor, sell the fact” type trading, but also might be an early warning sign to investors that a lot of the perceived strength in Q2 earnings—across the board, not just in banks—has been priced in to some extent over the last few months. Remember, the is already at levels many analysts had targeted for the end of 2021.

With that in mind, maybe investors won’t be surprised to see more of the same action in coming weeks, with major companies getting dinged on Wall Street despite nice earnings results. On a similar note, the Tech sector hit an all-time high yesterday, gaining despite overall weakness in the overall market. Could we see a little earnings-related profit-taking ahead in that sector when the big sluggers come up to bat in the coming weeks? Time will tell.

Small-caps, meanwhile, got taken to the woodshed early this week. The Index suffered its worst day in months yesterday. At the same time, the keeps rising, perhaps a sign of investors again thinking the Fed could get more hawkish. We talked last week about investors getting cautious, and the evidence is arguably still out there in the falling RUT and rising greenback even though Tech rose and bonds fell yesterday.

Powell In On-Deck Circle

Speaking of the central bank, Fed Chairman Jerome Powell—who’s scheduled to testify to Congress today and tomorrow—appeared to be among those encouraging patience on tapering stimulus at the last Fed meeting, judging by Fed minutes released last week. That’s a tune that seems unlikely to change in front of senators and representatives.

Possible questions for Powell from our public servants could include how long the Fed plans to let inflation continue climbing before tapping the “taper” button, so to speak. Some analysts shrugged off yesterday’s sizzling June consumer price index (CPI) data because a lot of the gains were caused by one category, used cars.

Despite that, the Fed might be feeling some heat, with inflation at levels not seen in nearly 30 years and showing no real sign of being “transitory,” to quote Powell, at least not yet. This is about the fifth month in a row people have been worried about rising prices.

Other questions for Powell could include whether the economy has enough stimulus without hundreds of billions of dollars in proposed additional infrastructure spending, and whether that might heat things up too much. There’s also the question of whether the Fed needs to keep buying mortgage bonds to the tune of at least $40 billion a month when the housing market appears to have emerged from COVID in pretty good shape. Even some Fed officials recently questioned the value of continuing those purchases.

Anyone thinking Powell will announce a serious change of course today or tomorrow should remember what he said last month about not raising rates preemptively as a check on inflation. It’s hard to imagine Powell, who’s been very consistent in his views, would change that outlook just a month later, even though he also confirmed last month that the Fed is “thinking about thinking about” tapering stimulus.

Powell and company are looking across the economy, including closely monitoring the jobs picture, and have pledged to let inflation go above its target if that’s what’s needed to get people back to work. Consensus on Wall Street seems to be that Powell will continue to sound dovish today, which brings us back to the old saying that many investors seem to be taking to heart lately: “Don’t fight the Fed.”

Overseas Trip Delayed

An outlet people sometimes turn to when Wall Street looks pricey is overseas stocks. Unfortunately, fears related to the recent Chinese regulatory crackdown on companies and the Delta variant of COVID could be keeping some of that money from flowing to foreign markets. This could mean more of it piling up here in fixed income and stocks.

U.S. stocks remain near record highs. Perhaps it’s the “TINA” (There Is No Alternative) effect helping the stock market again, as investors face little chance of making their money grow any other way so they keep “buying the dip,” as we’ve seen so often this year. This also might help explain the 2021 run on “meme” stocks and cryptocurrencies.

Despite companies raising dividends recently, especially the big banks, the average S&P 500 dividend yield of around 1.35% isn’t all that impressive, so people may be more likely to seek “growth” stocks. Sure enough, all the FAANGs rose after the inflation data yesterday, though some sagged later as yields moved up.

Vigilantism Taking A Powder? In the past, so-called “bond vigilantes” pushed bonds down heavily and sent yields higher when they thought the Fed wasn’t being tough enough on inflation. That’s not happening right now, for the most part. Case in point: Annual rose the fastest in nearly 30 years in June with the Fed funds rate at basically zero over the last 17 months, but Treasury yields actually fell slightly on Tuesday immediately after the data hit before rallying later in the session. Yields fell again today despite a hot PPI read.

Even considering the moderate jump in yields Tuesday as the inflation data got digested, the is still historically low at just above 1.4%. When you combine that with widespread expectations for nearly 8% Q3 economic growth (per the Atlanta Fed’s GDP Now indicator) and 5% inflation, it implies something is out of whack, at least from a traditional market standpoint.

It’s unclear how long this head-scratching situation might last, but in the meantime it could be very difficult for people on fixed incomes (retirees, for example) to make ends meet. They’re paying up for groceries, gas, and other products, but interest rates paid on their savings remain at historic lows. It’s a double-edged sword, because what’s good for stocks isn’t necessarily so good for people trying to make income from bonds or dividends.

Pizza And A Soda: If there’s been a standout category besides tech so far this week, give a shout-out to consumer-oriented stocks. Some of the familiar companies showing nice gains include Domino’s Pizza (NYSE:), Starbucks (NASDAQ:) and PepsiCo (NASDAQ:). Also, Chipotle (NYSE:) fell yesterday but has been on a roll the last month. Some of this could reflect people getting back out to stadiums, theme parks and restaurants. On the other hand, airlines have been under pressure for months and you’d think they might benefit from some of the same trends.

It’s a bit of a stretch to base big conclusions about the economy on a few weeks of sector activity in the market, but this kind of bifurcation could reflect people spending more on smaller purchases but not going fully back to the big spending on travel they once did. The number of passengers going through airports continues to lag 2019 levels by hundreds of thousands a day, according to government data. The only way we can really get a handle on it is by following companies as they present earnings and talk about their quarters. We’re in the right season for that, luckily.

Getting Theoretical About Earnings: You may have heard about “peak oil.” That’s the theory that at some point oil production will peak and only fall from there. It has yet to be proven. Another “peak” theory investors are hearing about a lot lately is “peak earnings.” This theory suggests that the Q2 earnings season might mark a “peak” of post-COVID earnings growth, implying a downhill run from here on. Be careful about mixing up your “peaks,” though. The “peak oil” theory implied that crude production would hit a top and begin falling. Peak earnings only means earnings growth could hit a top, not that earnings themselves can’t keep growing. We’ll discuss this more tomorrow, as Q3 and Q4 earnings projections both look strong.

Disclaimer: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

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