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The United States' biggest banks are in the hot seat this week.
JPMorgan Chase, Citigroup and Wells Fargo kick off bank earnings on Friday morning. Goldman Sachs and Bank of America report quarterly results next week. The financials sector is expected to see annual earnings growth of 4.3% during the second quarter, according to FactSet.
Investors will watch bank earnings closely for clues about how the American consumer and economy are faring in the face of sky-high interest rates and cooling, yet still elevated, inflation.
Dave Sekera, chief US market strategist at Morningstar, says that he's watching for insights on banks' delinquency rates. Consumers have increasingly fallen behind on or missed payments in recent months as they get squeezed by high interest rates. The share of credit card balances in serious delinquency, defined as payments 90 days or more late, rose to its highest percentage since 2012 during the first quarter, according to the Federal Reserve Bank of New York.
Corporate earnings and economic data in recent months have signaled that consumers are tightening their purse strings. US retail sales edged higher at an unexpectedly weak pace in May. Target, Home Depot and Best Buy have reported that shoppers are spending less on discretionary items, while discount retailers are benefitting as Americans hunt for deals.
The US financial system appears to be in a solid place after last year's regional banking crisis. All 31 banks evaluated in the Fed's annual stress test, which assesses the financial resilience of banks under hypothetical fraught conditions, passed this year. But banks could see higher losses compared to 2023 if the economy were to experience a downturn, the Fed warned.
Recession isn't the market consensus. Stocks have surged to repeated record highs in recent weeks as strong corporate earnings expectations, cooling inflation and a resilient labor market build the case for a soft landing, or a scenario in which the Fed brings inflation down without triggering an economic slump. Investors are wagering that the central bank will begin easing rates as soon as September, according to the CME FedWatch Tool.
Still, that doesn't mean banks aren't preparing for a less ideal scenario. Wall Street will keep an eye on their loan reserve levels. Those reserves contain cash that banks stockpile to protect themselves against potential defaulted loans.
Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation had roughly $218.6 billion reserved for loan losses during the first quarter of this year, according to FDIC data. That's up from the $202.1 billion financial institutions set aside during the same period in 2023 and $175.5 billion the year before that.
JPMorgan Chase CEO Jamie Dimon said at the company's global China summit in May that while consumers are still resilient, he believes a recession isn't off the table.
"The worst outcome for all of us is what you call stagflation: higher rates and recession," Dimon said in an interview with CNBC. "The world will survive that, but I just think the odds are a little bit higher than other people think."
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