$JPM, $WFC, $C

Macro Perspectives: Mon 17 Jan 2022

In my July 2020 Macro Perspectives note, I said "with the Fed absorbing all credit risk, and flooding the country with money, the banks are profit printing machines."

With that in mind, three of the big banks reported on Q4 Friday, kicking off Q4 earnings season. All beat earnings estimates, again (as they have throughout the pandemic environment). All are buying back stock.

For the full year 2021, Wells Fargo made $21.5 billion (net income), Citi made $22 billion & JP Morgan made $48 billion.

$WFC

$JPM

$C

Combined, that's better than the total economic output of 70% of the countries in the world.

So the banks win in crisis, as policy makers intervene to backstop risk.

And the banks win in recovery, as a tight labour market and strong consumer and business balance sheets lead to hotter demand for bank products - add to that, rising interest rates, where banks benefit from more profitable lending spreads.

That said, bank stocks remain cheap. Against last year's earnings JP Morgan trades at a P/E of 10, Wells Fargo at a P/E of 11.8, and Citi at a P/E of 6.6 (the cheapest of the big banks). Compare that to a broad market P/E of 29.

What's showing up early in the earnings calls? Last year it was the supply chain disruption and inflation. This year it's labor costs.

With that, a bigger move in wages is coming this year.

Few are more in tune with the economy and political agenda than Jamie Dimon (JPM CEO), and he said on Friday that they are willing to squeeze margins in the name of pay. He also sees a far more aggressive Fed this year than is anticipated (he thinks 6 or 7 hikes).

NB: U.S. Markets will be observing Martin Luther King Day today. Baring an event of significance, there will be no Macro Perspectives Note tomorrow.