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Why shares of JPMorgan Chase, Morgan Stanley and Goldman Sachs rose today


What happened

Many major bank stocks rose today after several banks delivered strong earnings reports this morning and the market received some good news on interest rates.

Stocks of the largest bank in the United States by assets, JPMorgan Chase (NYSE: JPM), rose more than 4.5% on Friday. Shares of Morgan Stanley (NYSE:MS) increased by 4.5%, and Goldman Sachs (NYSE:GS) was up 4.3%.

So what

JPMorgan Chase announced its results for the second quarter of the year on Thursday and saw its shares sell off after the bank missed analysts’ estimates for the quarter. Additionally, JPMorgan said yesterday it would suspend share buybacks for the time being as it builds capital to prepare for higher regulatory capital requirements in 2023 and 2024.

Morgan Stanley also posted earnings yesterday and struggled as investment banking earnings were weaker than expected. Investors weren’t expecting a good quarter, as events such as initial public offerings were very limited throughout the year due to market volatility and uncertainty. Still, the bank missed estimates of investment banking earnings.

For that reason, I don’t think investors had very high expectations for Goldman Sachs as it gears up for earnings on Monday, given its large investment banking business.

But today, investors seem to be backtracking. First, the big banks, including Wells Fargo and Citigroup, reported earnings that appeared to please the market, sending shares of both banks soaring. Citigroup in particular shattered estimates on the back of a strong performance in its treasury and trading solutions (TTS) business, which recorded its best quarter in a decade. Citigroup shares rose more than 13% today.

Another thing that probably helped bank stocks today is the fact that Fed Governor Christopher Waller and St. Louis Fed President James Bullard, two of the most hawkish members of the board of administration, said they supported a 75 basis point rate hike at the Fed. next meeting later this month. This seemed to catch the market off guard in a positive way, as it had thought the Fed might raise interest rates by a full percentage point.

Earlier this week, new data showed that the consumer price index (CPI), which tracks the prices of many consumer goods and services, rose 9.1% in June on an annual basis, which is more than economists had expected. Investors use the CPI to track inflation, so the extra-hot reading had concerns about a one-percentage-point rate hike.

Banks profit from inflation because it is usually accompanied by a rise in interest rates. But too much inflation hurts consumer finances and slows business activity, which naturally hurts banks because they are tied to the economy.

Now what

The more aggressive the rate hikes, the greater the likelihood of a recession. Rising rates are also expected to slow consumer and business spending, so the market seemed relieved by the 75 basis point news.

Bank earnings reports also showed that consumers and businesses remained financially healthy in the second quarter.

I’m generally bullish on bank stocks at the moment after they sold off heavily this year. They will benefit from rising interest rates, have enough capital to weather a modest recession, and continue to see strength in the economy – and while that last point may soon change, I still like the setup.

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Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Citigroup is an advertising partner of The Ascent, a Motley Fool company. Bram Berkowitz has positions in Citigroup and has the following options: long January 2024 $80 calls on Citigroup. The Motley Fool fills positions and recommends Goldman Sachs. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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