Stocks Rise as Wall Street Banks Reach Two-Year Highs

As Wall Street enters a new earnings season, stocks have surged to impressive heights, primarily driven by strong performances from major banks. The S&P 500 index has increased by 0.6%, marking its fifth consecutive week of gains — the longest winning streak since May.

Positive Earnings Reports Boost Market

The S&P 500 crossed the 5,800 mark this week, achieving its 45th record high of the year. Analysts were concerned that the Federal Reserve's upcoming rate cuts could negatively impact bank profits. However, the reality proved more positive, with JPMorgan Chase & Co. reporting a surprising rise in net interest income. In contrast, Wells Fargo & Co. saw a drop in net interest income, but anticipates that the decline will not be as severe in the approaching quarter. Both stocks saw increases of at least 4.4%, pushing the KBW Bank Index to its highest level since April 2022.

Market Outlook and Trends

Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management, expressed confidence about the earnings season, stating, "We expect earnings season to be solid, including the big banks. Credit card delinquencies are still very low, and increased economic activity should drive bank revenues." The overall market saw the Nasdaq 100 rise by 0.1%, the Dow Jones Industrial Average by 1%, and the Russell 2000 by 2.1%. However, Tesla Inc. experienced a notable drop of 8.8% after the details of its Robotaxi unveiling were seen as lacking. Conversely, shares of Uber Technologies Inc. and Lyft Inc. surged over 9.5%.

Economic Indicators and Financial Forecasts

The bond market exhibited minor fluctuations, particularly in shorter maturities which performed better than longer ones. A recent Bloomberg measure indicated consistent declines in U.S. bonds for the fourth week. Meanwhile, the dollar remained relatively stable, concluding a second consecutive week of gains as investors anticipated a more gradual pace of rate cuts. Crude oil prices for West Texas Intermediate settled below $76 a barrel.

Future Predictions and Historical Context

David Lefkowitz from UBS Global Wealth Management commented on the rate-cutting cycle, explaining, "Now that the Fed has started its rate-cutting cycle, the economy should get a further boost from lower interest rates on credit card debt and business loans. Therefore, we expect third-quarter earnings results to align with recent healthy trends." Historical data suggests that, during non-recessionary periods, the S&P 500 has risen by an average of 17% in the year following the onset of Fed rate cuts. Lefkowitz reiterated his price targets for the S&P 500 at 5,900 for December 2024 and 6,200 for June 2025.

Sector Performance and Earnings Forecasts

Financial sectors have typically excelled during periods of Fed rate cuts that culminate in a "soft landing," according to Torsten Slok from Apollo. He reviewed total returns across different sectors during previous non-recessionary rate cut cycles, identifying financials as key outperformers.

As we approach the third-quarter earnings season, a significant divergence has emerged. Analysts have been reducing expectations for S&P 500 companies, while management guidance suggests a much stronger outlook, indicating that companies are likely to exceed expectations. Currently, net income growth for S&P 500 companies is forecasted at a modest 4.2% for the third quarter, down from over 7% anticipated earlier in the summer, largely due to pressures within the energy sector. This pessimistic outlook is not limited to energy, as many other sectors anticipate declines except for communication services.

This quarter, 37% of S&P 500 companies are projected to report lower earnings per share compared to the previous year, a notable increase from 26.6% the prior quarter. The evolving landscape suggests that while uncertainties exist, opportunities for investors may arise as companies navigate through the anticipated earnings challenges.

Stocks, Earnings, Banks