Market All Over the Place Wednesday: What Wall Street's Saying

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Many stocks were largely down in a mixed market that never gained any traction Tuesday. Bank earnings have shown economic positives, which are outweighed by deeper concerns amongst investors.

The S&P 500 fell 0.66%. Big tech wasn’t helping, posting a basically flat move on the day. The 10-Year Treasury yield, down to as low as 0.71% Tuesday, ended the day down a touch to 0.73%. Yields fall when prices rise.

Since last week, the yield is down from 0.78% as investors are less convinced about the speed of the economic recovery and inflation. Investors have been favoring large cap tech this week, as it is a group of stocks that can grow through economic headwinds. The group has been viewed as rather defensive. Large cap growth is up more than 2% this week, while large cap value is down a tick.

Bank of America  (BAC) - Get Report missed revenue estimates by a few hundred million dollars, posting a result of about $20 billion. It beat earnings per share estimates (51 cents vs. 49 cents). Loan loss provisions were about $1 billion, down from $5 billion last quarter, indicating, as expected, the positive direction in consumer and business credit.

Still, like other banks, the stock fell even after a fairly solid earnings report. The yield curve has been compressing and bank analysts note that bank stocks cannot gain momentum until loan demand and interest rates pick up. Bank of America fell 5.29%. Shares of investment banks were holding in stronger, as capital markets and deal-making revenues are providing a significant offset to poor lending revenue.

Meanwhile, pushing back against the positive credit picture painted in bank earnings, investors are worried that delays in fiscal stimulus and delays in trials for coronavirus vaccines from several large producers will slow the economic recovery.

Many cyclical stocks were down, including some consumer discretionary stocks. Materials and industrial stocks had a solid day, with some up more than 3% as the producer price index showed recent inflation of 0.4% against estimates of 0.2%. Although that’s backward looking, investors are taking solace in the positive read.

Here’s what Wall Street’s saying:

Richard Ramsden, Bank Analyst, Goldman Sachs:

"Despite the weaker net interest income prints, management teams guided to a largely unchanged forward net interest income trajectory. In our view, banks need to see either a pick up in loan. Growth or a steepening of the yield curve. Banks sold off by 320bps (vs. only 60bps for the S&P 500) [a few days ago], which we believe reflects macroeconomic concerns, rather than weakness in the results (they beat FactSet consensus EPS on a core basis by 70% on average).”

Steven Ricchiuto, Chief U.S. Economist, Mizuho Securities:

"Another breakdown in the stimulus talks and yesterday’s consumer price inflation report appears to have caused investors to reconsider their views on the direction of long-term rates. Despite this reassessment, we are still holding to our 1% year-end call for the 10-year note, and a further 75 basis point increase in long-term rates by the end of 2021. This assessment is based on a combination of factors. First, we see the economy as well-anchored to a slightly above-trend growth trajectory, gradually increasing resource utilization at all levels within the economy. Second, we also see the Fed’s Jackson Hole policy shift as the right policy stance to take given the global deflationary forces."

Mark Haefele, Chief Investment Officer, Global Wealth Management, UBS:

"Earnings recovery should support the equity rally. Market volatility is set to continue in the weeks ahead as investors brace for a host of uncertainties—the timing of vaccine availability (after a setback for Johnson & Johnson), the size and timing of additional US fiscal stimulus, and the election outcome. The uneven recovery in the US economy also adds to investor concerns as the results season kicked off this week. But US corporate profits have been more resilient than expected. Second quarter results exceeded analyst expectations by more than 20%, and that strength has continued in recent months with estimates continuing to rise over the course of the quarter. On Tuesday, while noting weaker forward guidance, both JPMorgan and Citigroup reported stronger-than-expected results for 3Q, beating revenue and profit estimates. We have raised our S&P 500 earnings per share estimates for this year and next to USD 130 (-21% y/y) and USD 165 (+27% y/y), respectively."

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