(Bloomberg) — Wall Street banks’ outlook for the year will be in the crosshairs after a disappointing first look at earnings from Jefferies Financial Group Inc. and a blowout jobs report that fanned inflation fears.
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The Federal Reserve’s recent reticence to keep up the pace of interest-rate cuts was backed by Friday’s strong labor report that sent the stock market tumbling and yields higher. That throws cold water on investor hopes for a repeat of last year’s stock performance, which saw bank leaders climb 33%, outperforming the broader S&P 500.
Analysts have been counting on a revival in dealmaking and capital markets, revenue growth, as well a wave of share buybacks to further bolster the sector. Investors will get a chance to hear from the leaders of Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., and Wells Fargo & Co. when they kick off the first earnings season of the year on Wednesday.
Expectations for results — which cover the final quarter of 2024 — are generally rosy after the sector got a fresh boost from Trump’s win, as the president-elect is expected to usher in a wave of deregulation and business friendly tax policies that could be game changers for banks’ profitability.
“The question is not if capital markets set a record — it’s a matter of when,” said Mike Mayo at Wells Fargo. That could happen as soon as this year, he said. With annual outlooks likely overshadowing respectable fourth-quarter earnings, “the key is the guidance for how much revenues will grow faster than expenses.”
Election-fueled volatility in equity markets is also expected to have boosted the last quarter for banks. Citigroup and JPMorgan have already given investors an early glimpse into fourth-quarter results that could signal a pick up in trading.
“We expect trading revenues could come in even higher given the typical seasonal December slowdown just didn’t happen,” Morgan Stanley analysts led by Betsy Graseck wrote in a note.
Overall, Wall Street is bullish on the sector — Barclays analyst Jason Goldberg expects big bank stocks to extend the rally on hopes around the incoming president’s pro-growth, de-regulatory agenda but concedes that borrowing has remained sluggish as corporates assess what the post-election landscape will look like.
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The macroeconomic backdrop threatens to cast a pall over 2025 outlooks, which most banks reporting this week are expected to give. Investors want to know how the Fed’s recent interest-rate cuts and the slower-than-predicted policy easing cycle are playing out. While higher longer-term bond yields can be a benefit to net interest income growth and margins for lenders, they can also signal additional pressure on consumers and slow the pace of borrowing.
Rally Sputtering
There are other cracks in the bull thesis and share performance has been muted following the election as investors wait for earnings.
A disappointing report from Jefferies showed investing banking revenue and profit margin expansion likely fell short of Wall Street’s estimates. And expectations of a blowout year for initial public offerings — which would benefit bank earnings — may be tempered by market volatility and potential tariffs under a new administration.
The strength of the overall market is also coming into question. On Friday, the S&P 500 slumped 1.5%, notching its worst day since Dec. 18 and erasing the market gains the year started with. The KBW Bank Index fell 2.7%, also its worst day since Dec. 18.
Investors will be hoping the big banks can pull off a string of solid reports, which could help put a floor in otherwise choppy markets and help stocks resume their grind higher.
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