What's going on?
Investment banking behemoths Goldman Sachs and JPMorgan Chase reported second-quarter results on Tuesday – and they weren’t quite as bad as some investors had been anticipating.
What does this mean?
Investor skepticism may have been down to rival bank Citigroup, whose Monday report revealed a 5% drop in revenue from trading stocks and bonds – and a 10% drop in revenue from advising companies on things like mergers – compared to the same time last year.
But Goldman’s stock trading revenue was actually higher than a year ago, giving its total trading revenue the shot in the arm it needed to beat expectations. And its income from advising companies was higher than predicted too. JPMorgan was chaste: it reported a bigger decline in investment banking revenue than forecast. But like Goldman and Citigroup, it still managed a higher quarterly profit than investors expected (tweet this).
Why should I care?
For markets: Putting the cart before the horse.
Investors had sold off shares of Goldman Sachs and JPMorgan on Monday, seemingly in response to Citigroup’s results. But Tuesday’s better-than-expected report from Goldman led investors to buy up shares instead. For JPMorgan, however, there’s trouble ahead. Its business relies heavily on customer deposits and making loans. And an expected US interest rate cut this month meant the bank lowered its earnings forecast for this year.
The bigger picture: Buying back investor love.
Big American banks passed the recent stress test carried out by the US Federal Reserve (the Fed), specifically designed to make sure banks are well equipped to survive any forthcoming economic downturn. In giving them a passing grade, the Fed also signed off on banks’ plans to return even more cash to shareholders via dividends and share buybacks. Investors may continue to hold banks’ stocks as long as the payouts keep coming, but don’t be surprised if they turn tail when a recession hits – especially if banks aren’t as prepared as they seem…