Economists expect interest rate cuts this year to be smaller than investors expect, while it remains unclear how Trump will ease regulations.
The fourth quarter earnings season for U.S. stocks has begun, with large U.S. banks taking the lead in announcing their results. Major banks such as JPMorgan Chase (JPM), Citigroup (C), Goldman Sachs (GS) and Wells Fargo (WFC) all reported profits that significantly exceeded market expectations, while at the same time they said that credit demand was very strong, which is the overall condition of the U.S. economy. A good indicator.
Invest as the economy continues to grow, interest rates are lower than a year ago, and after the U.S. presidential election Driven by factors such as rising investor enthusiasm, the investment banking and trading businesses of large banks continue to grow.
Expectations of future loosening of antitrust regulations are part of the reason why investors are bullish on the banking sector and why they believe M&A activity will increase. During a period of rising interest rates and tighter regulations, companies were reluctant to engage in large-scale mergers and acquisitions, thus suppressing the growth of business related to large banks.
This sentiment has almost faded. The big banks impressed analysts and investors with earnings this week. The KBW Nasdaq Bank Index posted its largest one-day gain since November last year on Wednesday (January 15), before giving up a small portion of its gains on Thursday.
Note: The black line is the KBW Nasdaq Bank Index, and the blue line is the KBW Nasdaq Bank Index. S&P 500
Source: FactSet
Morgan Stanley (MS) fourth quarter profit That more than doubled year-on-year, with investment banking and trading revenue combined growing 49%. Goldman Sachs' profits will increase by 68% in 2024, and investment banking revenue will increase by 24%, mainly due to significant revenue growth brought about by drivers such as leveraged financing activities and initial public offerings (IPOs). Meanwhile, JPMorgan's investment banking revenue grew 46%. The big banks saw fee increases across "all products".
Wells Fargo, known for its retail banking business, has seen its investment banking fees surge by 59% due to a rise in consulting fees.Coordinated with increased stock and bond trading activity. Goldman Sachs CEO David Solomon told analysts this week that there is currently a lot of support for the bank's investment banking business, and at the same time, the willingness of companies to conduct mergers and acquisitions has increased.
Solomon said Wednesday: "No one can predict the future, but we believe there are some catalysts that will continue to drive increased M&A activity. There has been a significant change in the confidence of corporate CEOs. A shift, especially after the results of the U.S. presidential election.”
The surge is not just the work of experienced bankers and stock traders. In the wave of regional bank bankruptcies in 2023, large banks had to pay a large amount of money to help replenish the U.S. deposit insurance fund. As a result, the profits of large banks in the fourth quarter of that year were hit. This was also the reason why the profits in the fourth quarter of 2024 were significantly better than the previous year. a reason.
At the same time, the banking industry also faces some risks. Economists expect rate cuts this year to be smaller than previously expected, while it remains unclear how Trump will ease regulations.
JPMorgan Chase CEO Jamie Dimon noted on Wednesday that inflation remains a big problem and the Federal Reserve cannot cut interest rates as investors hope. Geography is another big issue. The recent ceasefire agreement in Gaza looks like it will help resolve the conflict in the Middle East, but there is still uncertainty in the relationship between the United States, Russia and China.
However, even Dimon, who has always been "worried", admits that the current unemployment rate in the United States is low, consumer spending is strong, and business confidence is relatively optimistic.
These are good for everyone, not just the big banks.