Bank Earnings Signal Tough Times Ahead

Some of the biggest US banks saw reduced profits in the first quarter of 2022. Prominent names, like Citi, Goldman Sachs, Morgan Stanley, JPMorgan Chase and Wells Fargo, all announced significant year-on-year profit declines in earnings reports this week.

Citi dropped 46%, Goldman Sachs fell 42%, Morgan Stanley dropped 11%, JPMorgan Chase lost 42% and Wells Fargo fell 21%.

Driven by, among other factors, low interest rates and big reserve releases, banks have enjoyed handsome profits in the last two years. These pandemic-era conditions are coming to an end. Throw in the turbulence caused by Russia’s invasion of Ukraine, and the markets have taken a real battering.

The US Federal Reserve has made it clear that it will take actions necessary to reduce inflation and this will certainly reduce economic growth. Mortgage loans at Wells Fargo have already fallen 33% from a year ago, showing that consumers are responding to higher interest rates by reducing spending.

What does this mean for me? 

As a diversified investor, you should closely watch quarterly earnings reports as part of  your economic calendar. These earnings reports paint a clear picture that hiking interest rates, while having the effect of reducing inflation, does slow consumer spending.

You can expect a similar pattern in all the major Western economies whose central banks have initiated strong moves to reduce interest rates.