Record earnings at big banks could keep the stock rally alive

In 2018, the largest US banks made more than $120 billion, an all-time high. Last year may have been even better.

We’ll find out soon. This week, the top six US banks — JPMorgan Chase, Wells Fargo, Bank of America, Citigroup, Morgan Stanley and Goldman Sachs — are scheduled to report earnings for the final three months of 2019.

Analysts are optimistic that a healthy US economy, a steadier picture for interest rates and solid loan growth powered banks to another year of records.

“We’re expecting the fourth quarter [last year] to do better than the fourth [quarter the year before], and that would put them in record earnings territory,” Stephen Biggar, director of financial institutions research at Argus Research, told me.

For banks, the recent challenge has been to fend off the impact of lower interest rates, which eat into their lending profits.

But lower rates also encourage more customers to borrow money — perhaps by issuing corporate debt, or taking out a mortgage. Meanwhile, jobs growth has been steady and consumer spending remains strong, so the cost of issuing credit is lower than it would normally be at this point in the cycle, according to Biggar.

“If you have a job, [or] you lose one and can easily find another one, then you’re current on your bills and you don’t have those defaults,” he said.

Investor insight: Bank stocks rallied in the final quarter of 2019. The KBW Bank Index rose roughly 13%, while the S&P 500 gained 9%.

Driving those gains, in large part, is clear messaging on interest rates from the Federal Reserve. The central bank signaled in December that after three cuts in 2019, it intends to hold rates steady in 2020. That helps banks since it gets borrowers off the sidelines who may have been waiting for rates to fall even lower.

The bigger picture: US banks kick off a busy earnings season. FactSet forecasts that overall earnings for the S&P 500 will decline by 2%. Should that outlook pan out, it would be the first time the index has had four straight quarters of year-over-year earnings declines since mid-2016, per analyst John Butters.

One step forward in the US-China trade fight

Nearly two years into the trade fight between the United States and China, the signing of the “phase one” US-China trade deal, expected Wednesday, will be a symbolically important moment — even if the reaction from investors is muted.

The latest: China said last week that Liu He, the country’s top trade negotiator, will travel to Washington to sign the agreement. Trump has said the signing will occur on Wednesday or “shortly thereafter.”

US officials and others familiar with the agreement have said it includes some cuts to existing tariffs and a pledge from China to purchase more American goods and services. China is also said to have agreed to make structural changes to how it deals with intellectual property rights.

A big caveat: It’s hard to know for sure what’s been agreed to since the text of the “phase one” agreement still hasn’t been released.

The deal also doesn’t mean the standoff between the world’s two largest economies is over. “Phase two” is expected to involve deeper issues that could be more difficult to resolve.

Plus, the United States continues to lobby allies to avoid Chinese telecom equipment company Huawei when building out next-generation 5G networks. No truce will be stable while the battle over technology continues behind the scenes.

Up next

Monday: New Boeing CEO starts

Tuesday: China trade data; US inflation data; Delta Air Lines, Citigroup, JPMorgan Chase and Wells Fargo report earnings

Wednesday: Bank of America, BlackRock, and Goldman Sachs report earnings

Thursday: US retail sales; Charles Schwab and Morgan Stanley report earnings

Friday: China GDP; State Street reports earnings