Earnings season kicks off as expected—with a fizzle, not a bang

The second-quarter earnings season kicked off Friday as expected with big banks JPMorgan Chase & Co. and Citigroup Inc. beating expectations and Wells Fargo falling short, but all three stocks fizzled in early trade as the numbers failed to inspire investors.

Wells Fargo shares WFC, -1.02%  were down 2.2% in midday trade, while Citi C, -1.82%  was down 2.7%. JPMorgan JPM, -0.07%  was down 0.2%, while the Dow Jones Industrial Average DJIA, +0.37%  rose 0.2% and the S&P 500 index SPX, +0.10%  was flat.

Analysts were expecting the numbers to be strong and for economic growth to support lending and volatile markets to support trading. But most correctly predicted that they were unlikely to reverse the weakness in bank stocks that has persisted since February.

“Earnings were mixed,” said JP Gravitt, chief executive of independent market news and research company Market Realist. “When you look at the different components, you can see that not everything is working. You have the yield curve inverting, banks can’t get net interest margins to grow, investment banking is not booming, and the loan business looks OK at JPMorgan, but not at Wells Fargo. Citi was somewhere in between.”

The backdrop of trade tensions with China and other major partners surfaced on earnings calls, but was shrugged off as “too early to matter.”

Read also: Trade war, tariffs and inflation will be the big worries this earnings season

JPMorgan Chief Executive Jamie Dimon said so far the escalating dispute was “affecting psyches more than economics.” Citigroup Chief Financial Officer John Gerspach said it is weighing on overall market, but not on his bank.

“It’s certainly had some impact in the overall feeling in the market, it’s created some uncertainty, so I do think it’s probably had some impact on people making decisions,” Gerspach told reporters on a call. “But from an overall business point of view we haven’t seen that impact as of yet.”

Gravitt from Market Realist said the trade issues are probably giving the bank’s big corporate clients whiplash. “if you’re a company and you want to put a plant in China or Mexico right now, you are not making that decision, so there is a pretty big economic outcome for some companies.”

See: As the trade war heats up, Goldman says take cover in these stocks

Dimon also played down worries about the flattening yield curve, as short-term rates rise with the Federal Reserve’s well-telegraphed interest rate increases, while the long-end of the curve falls, typically viewed as a precursor to an economic downturn or recession.

“You’re looking for potholes, there are not a lot of things out there,” he said in response to a question on the bank’s earnings call.

JPMorgan reported net profit of $8.3 billion, or $2.29 a share, ahead of the FactSet consensus of $2.22 a share. Loans rose 4% to $935.16 billion and net interest income rose 9% to $13.6 billion. Trading revenue rose 13% to $5.4 billion as fixed income revenue rose 7% and equity markets revenue rose 24% to $1.96 billion.

Citigroup reported net profit of $4.49 billion, or $1.63 a share, up from $3.87 billion, or $1.56 a share, in the year-earlier period. Revenue rose 2% to $18.5 billion. The FactSet consensus was for EPS of $1.56 and revenue of $18.5 billion.

Loans rose 4%. Trading revenue was down 1% to $3.9 billion as fixed-income trading fell 6%, while equities trading was up 19%.

Wells Fargo said net income fell 12% to $4.79 billion, or 98 cents a share, below the FactSet consensus of $1.12 a share, while total revenue slipped 2% to $21.55 billion, missing expectations of $12.68 billion.

Investors are now looking ahead to next week’s slate, which will start Monday with earnings from tech highflier Netflix Inc. NFLX, -3.62% If Netflix were to miss on subscriber additions, that would be a “big problem,” said Gravitt, that could trigger a big selloff of tech stocks, which have been leading the stock market all year with repeated record highs.

“The tech names better beat and raise, because if not there’ll be carnage in the market,” he said.

Read now: Here’s a hedge for investors against inflated FAANG stocks

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