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Stocks Rise, But Some Say Caution Is Warranted

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Stocks rose Tuesday, after encouraging economic data from China came out, even as bank earnings showed signs of economic stress. Some on Wall Street are cautious,

All three major U.S. indices rose, with the S&P 500 up 2.57%. Investors were a buyer of the 10 year treasury bond, with the yield falling to 0.73%, a defensive signal. 

Chinese exports fell 6.6% year-over-year, beating estimates of negative 14%, indicating global demand is far stronger than expected. 

But JPMorgan  (JPM) - Get JP Morgan Chase & Co. Report and Wells Fargo  (WFC) - Get Wells Fargo & Company Report reported earnings, with both banks saying the saw large credit loss provisions, an expense on banks’ income statements in which the bank sets side cash for expected credit losses on loans extended. This is an indicator of future credit problems in companies. 

JPMorgan said revenue came in at $29 billion, in line with estimates. The bank cited the growth of its balance sheet, likely involving strong loan volumes, as a major revenue driver, as low interest rates and Federal Reserve lending programs aid the banks’ balance sheet growth. But earnings per share, which contracted hugely year-over-year, was 78 cents against estimates of $1.84. JPMorgan’s loan loss provisions were over $8 billion, rising 22% year-over-year. 

JPM and Wells Fargo shares rose 0.73% and 1.57%, respectively. 

This is one negative earnings indicator for the U.S., among many indicators. Investment strategists, who are able to quickly model earnings for 2020 using macro assumptions, call for as much as a 40% decline in 2020 profit estimates compared to January. That’s while stock analysts, who take more time to update company models, have only reduced estimates by 12%.  

"Almost inevitably, the [earnings seasons] results will trigger widespread downward revisions,” wrote Nigel Gree, CEO of DeVere Group, in email remarks to reporters. 

"The divergence between the highest and the lowest analyst expectations are at record, confirming that financial experts have also lost their mark following an unprecedented halt in economic activity,” wrote Ipek Ozkardeskaya, senior analyst at Swissquote bank. "US stocks, which have entered bull market last week, could well reverse their latest gains.” 

Lauren Goodwin, Economist and Multi-Asset Strategist at New York Life Investment said, “We expect mixed investor reactions to expectations for more bad news ahead just as investor reactions have been mixed for deteriorating economic data. Market volatility will persist.” 

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