Among Big Bank stocks, JPMorgan Chase & Co. (JPM), Wells Fargo (WFC), Citigroup (C), Goldman Sachs (GS) and BlackRock (BLK) were the first to report second-quarter results this earnings season. profits.
Portales Partners founder and Wall Street Beats partner Charlie Peabody comes to Market Domination to talk about the dominant themes emerging in bank earnings, such as net interest income numbers
“In the short term, there is momentum in the capital markets. And so Goldman is a good momentum play, but we argue that its earnings stream remains much more cyclical than the market values them,” says Peabody. “And that’s the big debate going on in management, as they move away from their failed consumer banking strategy and back to their investment banking roots, trying to convince the Street that there is an underlying underlying earnings power that is sustainable and stable. I don’t believe them.”
Peabody also anticipates bank earnings due this week, such as Morgan Stanley (MS): “I think it will be more of the same – a strong investment bank, aiming for a rebound in M&A and IPOs in the second half of the year. And then trading will be driven more by equity trading and less by fixed income trading.”
For more expert insights and the latest market action, click here to watch this full episode of Market Domination.
This post was written by Luke Carberry Mogan.
Video transcript
Okay, big bank profits are ushering in another season.
The banks we have seen so far report mixed results, with analysts keeping a close eye on net interest income and how potential rate cuts could affect bank profits to get more out of those profits.
We have the gains we’ve seen so far and what we’re bringing to Charlie.
Peabody is a partner at Wall Street Beats and founder of Portalis Partners, Charlie.
It’s great to see you.
It’s been a minute.
So it’s a pleasure to talk to you.
The pleasure is mine.
So, Charlie, from what we’ve heard so far, um, it’s really been a mixed picture, but if you could zoom out, how would you characterize what we’ve heard so far?
So, we have one of the biggest JP Morgan City, Wells Fargo, today we also have Goldman Sachs and Black Rock.
But on the bank side, specifically, what is your biggest takeaway so far?
But the fundamental trends have been strong capital markets and weak net interest income or spread yields.
Hmm, and the point is that spread revenue will flex positively in the second half of the year.
If that happens, it will start to bring regionals back as a move.
And we started to see this rotation in the second half of last week, away from the big money center banks towards regional ones, with a continued supply in the capital markets.
Name Charlie.
I want to know your opinion about Goldman Sachs.
Of course, based on the results reported this morning by investors, Charlie seemed to like what they saw to boost the share price, which is now up almost 30% this year.
But avoid that name, Charlie.
It’s a sell-off, how come, well, in the short term, you know, there’s momentum in the capital markets.
And so Goldman is a good momentum play.
Um, but we argue that its earnings stream remains much more cyclical than the market is appreciating.
And that’s the big debate going on in management as they move away from their failed consumer banking strategy.
Back to their roots as an investment bank, they have been trying to convince the Street that there is underlying earnings power that is sustainable and stable.
And I don’t believe them.
And I think as you start to see more volatility in the capital markets, you’ll see cyclicality emerge in your earnings stream.
Um, so I think, you know, we’re seeing the best price of these stocks here and now and, I would certainly sell on the other hand.
You like Citigroup, you know, apparently there’s been a lot more belief in Jane Frazier’s turnaround efforts at that bank.
What was something about this earnings report that really convinced you that it’s making progress?
Well, I think Citi has some things within its reach that are not dependent on macros, kind of the opposite of Goldman, where they are very dependent on macros.
Um, they’re, you know, in the middle of a streamlined reorganization process, which will allow them to reduce their expense structure from 54 billion this year to 51 billion in 2026.
They are in the process of improving their balance sheet strength, especially on the capital front.
And I think they’ll be able to repurchase, you know, billions of dollars worth of shares at deep discounts to reserve.
So that should improve your, um, you know, rot.
Um, furthermore, there are certain businesses like the credit card business that are underperforming and as the losses in that business wax and wane, you will see a significant improvement in the returns and earnings from that operation.
So we think stocks are going to, you know, gravitate more toward book value as they improve their ROTC from a 7% level today to 10 to 12% in ’26.
In the meantime, we think their book value will rise, you know, to over $100 in ’26.
Therefore, we believe the discount to projected book value of $100 will narrow sharply over the next 2-3 years.
Charlie, let’s go tomorrow morning, with Morgan Stanley on deck.
What do you expect to hear when they report Charlie?
I think it’s going to be more of the same, you know, a strong investment bank, aiming for a recovery in M and A and IP OS in the second half of the year.
And then trading will be driven more by equity trading and less by fixed income trading.
Um, I’m looking for a dollar of 68 for the quarter with about 14.1 billion in revenue.
Do you think Morgan Stanley is subject to the same kind of cyclicality that you talked about with Goldman Sachs?
No.
And that’s when you know that what Gorman did to transform this franchise was significantly different from what Solomon tried to do at Goldman Sachs.
He built a wealth management operation, an investment management operation with much more stable revenue streams.
So I think they have mitigated the cyclicality of their business part of the investment banking franchise.
Charlie.
Thank you again.
Appreciate your perspective.
The pleasure is mine.
