Goldman Sachs, Citigroup, and Bank of America: The Key to New Market Highs?

Last Friday, better-than-expected earnings from major banks like JPMorgan and Wells Fargo helped lift both the S&P 500 and Dow Jones to record highs. This surge has left investors speculating whether earnings reports from Goldman Sachs, Citigroup, and Bank of America—set to be released today—might push these indices even higher, potentially fueling a broader market rally for the remainder of the year.

The S&P 500 and DJIA Reach New Highs at the Start of Q3 Earnings Season

JPMorgan’s stock surged 4.4% on Friday before pulling back slightly, losing 0.36% on Monday. Wells Fargo followed a similar trend, gaining 5.6% last week and extending those gains with a 1.94% rise on Monday. While these strong performances helped boost the broader market, additional factors contributed to pushing both the S&P 500 and Dow Jones Industrial Average (DJIA) to new highs.

Investor optimism has been driven by a combination of favourable economic data—such as robust job reports and signs of cooling inflation—along with growing enthusiasm for advancements in artificial intelligence (AI). Nvidia, a major player in the AI space, saw its stock climb more than 2% yesterday, closing at a record high just above $138, cementing its position as the second most valuable publicly traded company in the world after Apple.

On Monday, the S&P 500 rose 0.77% to reach 5,859.85, marking a nearly 23% gain year-to-date. Meanwhile, the Dow Jones advanced by 201.36 points, closing at a record 43,065.22—the first time it has ever closed above the 43,000 mark.

As the Q3 earnings season gets underway, analysts are closely scrutinising corporate performance to assess the overall health of the U.S. economy. Early reports have been encouraging, with 30 companies in the S&P 500 already surpassing earnings expectations by an average of 5%, according to Bank of America. This marks an improvement over the 3% earnings beat seen at the start of last quarter.

This week, 41 additional S&P 500 companies are scheduled to report their financial results. These earnings will offer critical insights into the resilience of corporate America and whether current stock market valuations are justified. Notably, the S&P 500 is currently trading at 21.8 times forward earnings, significantly above its long-term average of 15.7. This elevated valuation suggests that investors are betting on continued strong earnings growth, but any disappointment in results could trigger a market correction as valuations are reevaluated.

Despite the positive start to earnings season, Bernstein has cautioned that year-over-year earnings per share (EPS) growth for this quarter may come in considerably lower than last quarter’s. Additionally, traders are bracing for increased market volatility, with Bank of America data suggesting that stock price swings following earnings announcements could be the largest seen since early 2021.

Further volatility is expected as the U.S. presidential election draws nearer. Political uncertainty tends to weigh on markets, as investors anticipate possible changes in economic policies, taxes, and regulations, leading to fluctuations in stock prices. This heightened uncertainty may drive traders to adopt a more cautious stance as the election season intensifies.

All Eyes Will Be on the Evolution of Banks’ Net Interest Income (NII)

While both JPMorgan and Wells Fargo recently exceeded market expectations in their earnings reports, they are facing profit declines and ongoing pressure on Net Interest Income (NII) due to recent Federal Reserve rate cuts and a loosening of monetary policy. With more banking giants set to release their results this week, the evolution of NII will be a key focus for traders assessing which banks are better positioned to navigate this “post-rate-hike” environment.

What is Net Interest Income (NII)?

Net Interest Income (NII) is the difference between the interest banks earn on loans and the interest they pay on deposits. Banks generate income from loans they provide to customers—such as mortgages, car loans, and business loans—but they also pay interest on customer deposits, like checking and savings accounts. NII represents the profit banks make from borrowing money at a lower rate (through deposits) and lending it out at a higher rate (via loans).

Because NII directly reflects how well a bank manages its lending and borrowing operations, it is one of the most important drivers of bank profitability. When interest rates are high, banks can earn more on loans, boosting their NII. However, with the Federal Reserve cutting rates, banks face shrinking interest margins, reducing their ability to generate income from loans.

Why is NII Important for Traders?

Traders are especially focused on NII now because, as the Fed continues lowering rates, banks’ loan yields are expected to decrease, which could further compress NII. Lower interest rates mean banks earn less from borrowers, but they still need to offer competitive rates on deposits to retain customers. This dynamic creates a challenging environment for banks to maintain profit growth, making NII a critical metric for evaluating how well they are managing this balance in a low-rate climate.

In this environment, traders will closely monitor how different banks adjust their NII strategies to determine which institutions are better positioned to maintain profitability and potentially outperform their peers in the coming quarters. Understanding how banks respond to shrinking margins will provide valuable insights into their ability to thrive in a period of lower rates.

Another Key Market Event of the Week: The ECB Monetary Policy Meeting

The European Central Bank (ECB) is set to implement its third interest rate cut of the year at its meeting on Thursday, driven by two key factors. First, inflation in the Eurozone is falling faster than expected, dropping to 1.8% in September—below the ECB’s 2% target. Second, concerns over an economic slowdown are growing, as indicated by weak PMI data and the ECB’s recent downward revision of its growth forecast. The bank now projects GDP growth of 0.8%, down slightly from its previous estimate of 0.9%.

Given these developments, the ECB is expected to reduce its key interest rate by 25 basis points to 3.25% in October. Markets also anticipate another cut to 3% at the ECB’s final meeting of the year in December.

With these rate cuts largely priced in, attention will likely shift to the ECB’s forward guidance and any signals about its future policy direction. Traders and analysts will closely examine the bank’s communication for insights into the pace and scale of further rate cuts, as well as any indications of additional policy measures aimed at stimulating the economy.

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