Big banks kick off earnings season Friday. There's a lot riding on the line.
Investors are on edge this week after the latest Consumer Price Index released Wednesday showed that inflation grew faster than expected in March. The S&P 500 index has fallen 0.8% this week, the Dow Jones Industrial Average has declined 1.1% and the Nasdaq Composite has lost 0.5%.
That has turned up the pressure for corporations to make a strong showing this upcoming earnings season, which investors already hoped could help revive the sputtering stock rally.
"Earnings season just became significantly more important," said JJ Kinahan, chief executive of IG North America, in a Wednesday note. "The market has more or less acknowledged that any stimulus from a rate cut [is] becoming less likely. As a result, that's shifting the onus for not just further market gains, but sustaining existing gains, on earnings."
JPMorgan Chase, an economic bellwether due to its staggering size, reports first-quarter results Friday morning. BlackRock, Citigroup, Wells Fargo and PNC Financial Services also report quarterly updates.
Investors will watch closely for signs that Americans are continuing to open their pocketbooks despite interest rates hovering at a 23-year high. Consumer spending has stayed robust at large, but retailers have warned in recent months that lower-income consumers are tightening their purse strings. Surging gas prices are also taking a bite out of Americans' income.
"You'll be wanting to look at, are there early signs of stress on the consumer that banks are reporting?" said Carol Schleif, chief investment officer at BMO Family Office.
Persistent inflation and the economy's unflinching resilience have forced Wall Street to pare back its expectations for when and how many times the Federal Reserve will cut rates this year. Wall Street expected as many as six rate cuts earlier this year. Now, some investors say that the Fed could cut rates just once or twice in 2024, rather than the three projected, or keep them on hold through year's end. Some economists even believe another hike could be warranted.
Traders see a roughly 19% expectation that the Fed will cut rates in June after the latest inflation data, according to the CME FedWatch Tool. That's down from a 56% expectation a day ago.
Elevated rates are a double-edged sword for banks. On one hand, lofty rates could help pad banks' net interest income, since they can charge a higher borrowing rate for loans and mortgages. But that could also add stress to the financial sector and in turn destabilize the economy. The collapse of several regional banks roiled the stock and bond markets last March as investors feared that sky-high rates could help trigger a recession.
Fears of a downturn have abated in recent months as economic data has remained robust. But JPMorgan CEO Jamie Dimon believes that a recession still isn't off the table. He wrote in his annual letter to shareholders published Monday that the bank is prepared for a range of scenarios, including rates topping 8% and stagflation, or when the economy downturns while inflation remains high.
"Markets seem to be pricing in at a 70% to 80% chance of a soft landing," wrote Dimon. "I believe the odds are a lot lower than that."
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