Banks - In The Sweet Spot

Macro Perspective: Tue 12 Oct 21

Q3 earnings will be the focus this week.

As we’ve previously discussed, we should expect the earnings calls to be heavy on inflation talk. With the conversation surrounding these calls to be about, what appears to be, success companies are having in passing along costs to consumers.

The banks will set the tone this week, we'll hear from JP Morgan on Wednesday and the other three of the big four banks will be on Thursday.

On the topic of "costs": The head of JP Morgan, Jamie Dimon, said yesterday at a conference that consumer demand is "extraordinary," even in the face of supply chain disruptions and higher prices. He says consumers are spending 20% more today than a year ago.

On the one hand, he's talking about the total dollar value of spending (which means there is, at least, a fair amount of higher prices represented in that statistic) - ; it also means that consumers have the confidence to spend. That's a big deal. That's underpinned by a higher savings rate and a job market where employees are in a position of strength to command higher wages.

So, a strong consumer should fuel plenty of positive talking points for the banks this week. In the case of JP Morgan it has already been an embarrassment of riches, as they've beaten revenue and earnings every quarter coming out of the pandemic, with record profits in the first half of 2021.

Also remember, as we've discussed over the past year, the banks have a war chest of loan loss reserves (set aside in the depths of the pandemic) that they will continue to move to the bottom line at their discretion. That means they have a large inventory of positive earnings surprises they will present to us for several quarters to come. Add that to a (coming) rising interest rate environment, and the bank stocks are in the sweet spot.