Pro Perspectives 7/18/23





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July 18, 2023

As we discussed last week, we headed into Q2 earnings season with a market that had low expectations — looking for a 7% contraction in S&P 500 earnings.  That sets up for positive surprises.
That's what we're getting.  And positive surprises are fuel for stocks. 
JP Morgan, the biggest bank in the country, kicked off Q2 earnings with record revenues and record earnings.  And the message was positive on the health of the consumers and businesses. 
Bank of America delivered one of the strongest revenue and net income quarters in the company's history.
And Wells Fargo and Citi, the other two of the big four banks, both beat on revenues and earnings.
Still, all of the big banks continue to manufacture down earnings, to the extent they can.  How?  They continue to set aside money for future credit losses — to the tune of about $2 billion in Q2, between the four banks. 
This, even though, in the case of Bank of America, the loan loss rate is running below pre-pandemic levels.  
And this reserve build only adds to a warchest, which now nears $60 billion (between the big four), set aside as "allowances for credit losses."  That's 44% bigger than prior to the  pre-pandemic era.
As we've discussed in the past, the banks are "heads they win, tails they win" businesses.  
When times are unstable over the past fifteen years, they've been backstopped by the Fed (de-risked), and incentivized to fuel credit creation to help the economy — from which they make money in loan origination, investment banking and trading.
When times are more stable, their customer account balances balloon (as they have now), from which they get to earn a very healthy interest rate spread from the rising interest rate environment.
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