Investment banking, looking in the mirror for signs of a recession on Wall Street
It’s time for the truth. The campaign of corporate results in the United States begins, with the world of investment pending if any signal is activated that gives indications that the country is heading towards an economic recession. For now, the workforce adjustments of some large technology companies in Silicon Valley and the announcements of some investments to cut jobs –such as the case of Goldman Sachs– could serve as a prelude to what we have to see. The market agents will be more attentive than active.
As always, investment banking is starting the season for presenting corporate accounts. In this sense, what could the market expect? Consensus sees US banking giants post lower quarterly profits in the quarter as lenders are building up provisions for the possibility of hard times to prepare for an economic meltdown.
The four big names in the country, JPMorgan, Bank of America, Citigroup and Wells Fargo, will attend their appointment with investors on Friday. Along with Morgan Stanley and Goldman Sachs, they are the six largest lenders expected to accumulate a combined $5.7 billion in capital buffers to prepare for potential bad loans, according to Refinitiv forecasts. That’s more than double the 2,370 provisions booked a year ago.
“With most US economists forecasting a significant recession or slowdown this year, banks are likely to factor in a tougher economic outlook,” Morgan Stanley analysts led by Betsy Graseck commented in a recent note distributed to the institutions.
The Federal Reserve is aggressively raising interest rates in an effort to control inflation near its highest level in decades. Rising prices and higher borrowing costs have led consumers and businesses to cut spending, and since banks serve as economic intermediaries, their profits tend to fall when activity slows.
Thus, it is also expected that the six banks present a decrease of 17% on average in their net profits in the fourth quarter compared to the previous year, preliminary estimates according to Refintiv analysts. However, banks could benefit from rising rates that allow them to earn more from the interest they charge borrowers.
“I think we have to be more realistic,” says Miller Tabak chief market strategist Matt Maley. “The Fed started raising interest rates and we are starting to feel the impact of that in the economy. At some point, I think people will realize that profits will have to go down, ”he elaborates.
The adjustment in listed
Investors and analysts will focus on comments from bank officials as an important indicator of the economic outlook. The departure of many executives in recent weeks from these entities has heralded the most difficult business environment, which has led companies to cut bonuses or lay off part of their workforce.
The forecasts are bleak: S&P 500 companies may report the first drop in profits since the third quarter of 2020, with an expected 4.1% forecast for the quarter, according to consensus compiled by FactSet. Analysts have cut their projections by 6.5% since September 30, more than 1.5 times the average decline of the last twenty years.
And there are many strategies that think that those numbers have not gone down enough. “We still can’t shake off the horrors of 2022. This will be your chance to acknowledge the full extent of the damage of 2022 and, more importantly, reveal what you are preparing for this year,” say Pipler Sandler analysts.
“La is still high and rates are not yet peaking. Geopolitical tensions may have eased somewhat in some areas of the world but have exacerbated in others, while the shock of China’s sudden reopening came too late to have much effect on fourth-quarter earnings.
Globally, economies are slowing, catching up with the gains of S&P 500 companies and increasing recession risks. All of this has turned into unusually gloomy earnings sentiment as the reckoning nears. David Kostin, chief equity strategist at Goldman Sachs, explains that downward revisions to corporate earnings are occurring “at a pace that in recent years has heralded a recession.”
This latest wave of earnings pessimism can be seen as a third dose of downgrades to expected 2023 earnings. This is something that, according to Evercore, “could happen again.”