Stocks Rise as Wall Street Banks Reach Two-Year High

On Wall Street, stocks experienced a notable increase as they began the earnings season with impressive results from major banks. As a result, the S&P 500 index rose by 0.6%, marking its fifth consecutive week of gains, the longest streak since May.

The S&P 500 Achieves New Heights

The S&P 500 surpassed the 5,800 mark, achieving its 45th record high of 2024. Investors who were initially concerned that the Federal Reserve's upcoming rate cuts would hurt bank profits were pleasantly surprised. JPMorgan Chase & Co. reported a surprising rise in net interest income, while Wells Fargo & Co. saw a decline but anticipates a less dramatic drop in the upcoming quarter. Following these results, the stocks of both banks increased by at least 4.4%, driving the KBW Bank Index to levels not seen since April 2022.

Michael Landsberg, the chief investment officer at Landsberg Bennett Private Wealth Management, expressed confidence in a solid earnings season for major banks, highlighting that credit card delinquencies remain low and that an uptick in economic activity should bolster bank revenues.

Broader Market Movements

Alongside the S&P 500, the Nasdaq 100 saw a 0.1% increase, while the Dow Jones Industrial Average gained 1%. The Russell 2000 index climbed by 2.1%. However, Tesla Inc. faced an 8.8% drop after revealing its Robotaxi concept, which lacked specific details. In contrast, ride-sharing companies Uber Technologies Inc. and Lyft Inc. both surged by over 9.5%.

Treasury bonds experienced modest movements, with shorter-term maturities showing stronger performance. A Bloomberg measure of US bonds reflected a fourth consecutive week of decline. The US dollar remained stable, wrapping up its second week of gains, as investors anticipated a slower rate of cuts by the Federal Reserve. Meanwhile, West Texas Intermediate oil prices settled below $76 per barrel.

Expectations for Economic Growth

As the Federal Reserve embarks on a rate-cutting cycle, David Lefkowitz from UBS Global Wealth Management pointed out that lower interest rates on credit cards and business loans could provide a boost to the economy. He anticipates that the third-quarter earnings results will align with the recent positive trends. Historical data suggests that when the Fed initiates rate cuts without recession, the S&P 500 typically sees an average increase of 17% in the following year, prompting Lefkowitz to maintain his price targets of 5,900 and 6,200 for December 2024 and June 2025, respectively.

Financial Sector Performance

Financial stocks have often been top performers during rate-cutting cycles that result in a “soft landing,” according to Apollo’s Torsten Slok. Analyzing total returns across sectors during past rate cut periods, Slok emphasized that financials typically excel.

Mixed Signals Ahead of Earnings Season

As the third-quarter earnings season approaches, a significant divergence has been observed, as highlighted by Gina Martin Adams, Michael Casper, and Wendy Soong at Bloomberg Intelligence. Analysts have been revising down their earnings expectations for S&P 500 companies, while management outlooks suggest a stronger performance ahead. This discrepancy is expected to lead to companies outperforming expectations.

Forecasts for the S&P 500’s net income growth have declined to 4.2% for the third quarter from an earlier estimate of over 7% in mid-July, primarily due to the energy sector's weaker performance. However, this pessimistic outlook is not confined to energy alone, as forecasts for nearly all sectors, except communication services, have also diminished. Currently, 37% of S&P 500 companies are projected to report lower earnings per share compared to the same quarter last year, an increase from 26.6% in the previous quarter.

Stocks, Market, Earnings