S&P 500 CLIMBS AS BANK EARNINGS SHOW ANTICIPATION FOR HEAVY LOAN LOSSES AHEAD TALKING POINTS:
- JPMorgan and Wells Fargo increase reserve builds as the banks expect a rough economic recovery
- The S&P 500 Index climbs higher despite the weak earnings from JPM and WFC
- IMF economic outlook for 2020 shows a 3 percent contraction for global growth
The S&P 500 Index finished well in the green Tuesday as earnings season kicked off with two of the largest banks in the United States reporting Q1 earnings this morning. JP Morgan Chase printed earnings of $0.78 per share, missing estimates of $2.49. Wells Fargo also missed with EPS of $0.01 versus estimates of $0.61 per share. JP Morgan and Wells Fargo ended the trading session -2.74% and -3.98% respectively.
S&P 500 INDEX (5-MIN CHART)
Source: IG Charts
Despite the weak prints, US equity markets are now well above their March lows as central banks and fiscal policymakers have enacted record breaking stimulus into the economy. New York’s recent decline in virus deaths may also be supplying further fuel for equities as NY Governor Cuomo said ‘the worst is over’ on Monday as fatalities appear to be declining in the hard-hit state.
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While signs may be appearing for a peak in the virus pandemic, the fallout to the economy is likely to persist through the year according to two of the largest banks in the United States. Chase reported a 69 percent decline in net income as they increased reserve levels by $6.8 billion for a predicted sharp uptick in credit losses. Wells Fargo also increased its reserves in anticipation for economic distress in the months ahead, with a $3.1 billion build in its reserve levels.
S&P 500 VERSUS JPM AND WFC (2-HOUR CHART)
Created by Thomas Westwater in TradingView
Adding to the calls for economic fallout to continue through the rest of the year, the IMF released its world economic outlook this morning,forecasting the deepest global recession since the great depression of the 1930’s. The Great Lockdown, as the IMF terms it, is expected to put a serious hit on global growth for the current year forecasting a 3 percent contraction, 6.3 percent lower than the last forecast from the organization.
Going forward, banks may see a rough path to recovery versus other sectors of the economy with less exposure to the expectedly harsh economic conditions ahead. Recent actions from the Federal Reserve may also drag on the banking sector altogether, with interest rates near zero. This, combined with the loss on loans going forward, presents somewhat of a double-edged sword to banks, which normally see higher profits in periods where interest rates are high.