S&P 500 Continues to Trade Around Highs as Big Banks Beat on Earnings

JPM, GS, WFC Earnings Talking Points:

• JP Morgan, Goldman Sachs, and Wells Fargo all reported Q1 EPS strongly above the consensus estimates.
• Bank stocks have benefitted from the rise in US yields in 2021.
• The US economic outlook is continuing to brighten on vaccinations and stimulus.

S&P 500 Continues to Trade Around Highs as Big Banks Beat on Earnings

Futures contracts on the S&P 500 point to the index opening around the fresh all-time-highs set yesterday as earnings season kicks off with blowout numbers from some of the largest US banks. JPMorgan reported Q1 EPS of 4.50 versus an estimate of 3.05, Goldman Sachs reported Q1 EPS of 18.60 verses an estimate of 10.06, and Wells Fargo reported Q1 EPS of 1.05 versus an estimate of 0.68. Strength from the financial sector can be a further tailwind to a stronger economic recovery.

S&P 500 E-Mini Futures – 45 Minute Time Frame (April 2021)

Chart created by Izaac Brook, Source: TradingView

Overall, strong beats in earnings painted a sharp comparison to the banks’ Q1 2020 earnings, when they set aside billions in loan-loss reserves as the economic outlook darkened. The outlook has vastly improved over the past year as vaccinations, fiscal stimulus, and easy monetary policy have supported the economy through the height of the Covid-induced recession. JP Morgan and Wells Fargo both announced the release of billions in loan–loss reserves that had been set aside at the onset of the pandemic as the depth of losses seen last spring look less likely.

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US 10yr Treasury Yields & XLF Financial Sector ETF (December 2020 – April 2021)

Chart created by Izaac Brook, Source: TradingView

Banks have seen both their earnings and their share prices rise alongside the rise in longer-term US yields that took hold at the beginning of 2021. As interest rates rise, the profit margins and earnings of banks rise as they charge more to lend and make more off of their ongoing activities. While the rise in 10yr yields has been bullish for banks through the end of March, further increases in yields seem to have been put on pause, with the 10yr yield remaining below the 1.70% level. Without further moves higher in yields, bank stocks may struggle to move much higher than their current levels.

— Written by Izaac Brook, DailyFX Research Intern