Stocks Climb as Wall Street Banks Reach Two-Year Highs

In recent trading, stocks showed positive momentum as Wall Street banks experienced significant gains, reaching their highest levels in two years. The S&P 500 index rose by 0.6% this week, marking an impressive five consecutive weeks of growth, which is its longest stretch of winning weeks since May.

As the earnings season began, major banks reported solid financial performances, which helped push stocks to all-time highs. The S&P 500 surpassed the 5,800 mark, achieving its 45th record for the year 2024. Concerns among equity traders regarding potential Federal Reserve rate cuts negatively impacting bank profits were alleviated, particularly after JPMorgan Chase & Co. reported a surprising increase in its net interest income.

Meanwhile, although Wells Fargo & Co. saw a decline in its net interest income, executives were optimistic that the downturn would be less severe in the final quarter of the year. Both JPMorgan and Wells Fargo's stocks increased by at least 4.4%, pushing the KBW Bank Index to its highest level since April 2022.

Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management, stated, "We expect earnings season to be solid, including the big banks. Credit card delinquencies are still very low, and increased economic activity should drive bank revenues."

The S&P 500's gains extended its bullish streak. The Nasdaq 100 saw a slight increase of 0.1%, while the Dow Jones Industrial Average gained 1%, and the Russell 2000 climbed 2.1%. However, Tesla Inc. faced an 8.8% decline after revealing its new Robotaxi model lacked detailed specifications, contrasting sharply with significant gains of over 9.5% for Uber Technologies Inc. and Lyft Inc.

Bonds experienced only minor fluctuations, with shorter-term maturities performing well. A Bloomberg index of US bonds recorded a fourth consecutive week of declines. The dollar exhibited slight movement, closing a second week of gains amid expectations of a slower pace of rate cuts. Additionally, West Texas Intermediate oil prices settled beneath $76 per barrel.

David Lefkowitz from UBS Global Wealth Management commented, "Now that the Fed has initiated its rate-cutting cycle, the economy is likely to get a boost from lower interest rates, particularly on credit card debt and business loans. Therefore, we anticipate the third-quarter earnings results will align with the recent trend of healthiness."

According to Lefkowitz, when the economy does not enter a recession, the S&P 500 typically rises by an average of 17% in the 12 months following the start of Fed rate cuts. He reaffirmed his price targets for the S&P 500 at 5,900 for December 2024 and 6,200 by June 2025.

Apollo's Torsten Slok noted that the financial sector tends to be a standout performer during the Fed's rate-cutting cycles that result in a "soft landing" for the economy. Slok examined the total returns of various sectors during two previous rate-cutting periods that did not coincide with a recession, from July 1995 to January 1996 and from September 1998 to November 1998.

In anticipation of the upcoming third-quarter earnings season, a notable disparity appeared. Analysts have progressively lowered earnings expectations for S&P 500 companies while management guidance has suggested a much stronger outlook. This implies that many companies are likely to exceed projected earnings. Current forecasts predict a mere 4.2% growth for S&P 500 net income in the third quarter, down from over 7% initially anticipated in mid-July, largely due to the energy sector. However, the pessimistic outlook from analysts extends beyond energy, with earnings estimates declining across all sectors except communication services.

According to Bloomberg Intelligence, 37% of S&P 500 companies are expected to report lower earnings per share compared to the previous year this quarter, an increase from 26.6% in the prior quarter.

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