US markets are in danger of frothing up again
The start of earnings season always has an impact on Wall Street, and Friday was no different.
Even before they were published, the earnings of J P Morgan, Citigroup and Wells Fargo were already estimated to be huge in the three months to the end of March.
And for the most part they didnt disappoint, ensuring earnings season got off to a flying start.
J P Morgan beat estimates with net income up 35% – compared with the same quarter a year earlier – to $8.7bn. Meanwhile, Citigroup reported a 13% rise in net income compared with the same quarter a year earlier, to $4.6bn. Wells Fargo was the only fly in the ointment reporting a 9% fall in net income in the first quarter to $7.7bn.
With tax cuts, rising interest rates and a general spirit of more robust economic growth, such stellar results are hardly surprising.
US economic boom
In just the past three months, analysts have more than doubled their forecasts for the financial sector as a whole, with banks leading the way.
So, are we back into rally territory? Has the market volatility of the past two months been put aside? Will Wall Street continue to reach ever higher?
Perhaps, but there is still the possibility of a trade war with China and, even if that doesnt occur, the imposition of tariffs in the recent weeks has yet to bite. There is also the potential for a real – not trade – war in the Middle East too.
Both things, oddly, have the potential to balance each other out: while Chinese tariffs might hurt the US economy, a contained conflict in the Middle East would probably boost economic growth.
But a war would also require borrowing, which the Trump Administration is already pushing to limits that are making Republican politicians particularly uncomfortable, thanks to the tax cuts passed by Congress at the end of last year.
What is certain is that if the banks are doing well, there should be few US businesses doing badly.
So the prospects for the first US earnings season of this year seem pretty good. If earnings are strong, then the first estimate of quarterly US GDP in two weeks time should also be strong.
All of which should see the Dow Jones rise, perhaps back as far as 26,000, perhaps well beyond. And therein lies the danger. Could Wall Street take a strong earnings season and run with it to the extent that the Dow races towards 30,000? But if it does, the danger will be, of course, that when it falls, it falls further than it did at the start of February.
Taken together with tariffs, the effect of which will only really begin to be felt in the second quarter, and there is an, admittedly small right now, danger that we could see a crash later in the year. No-one wants that.
But equally, strong earnings from the banks are only likely to convince America of its own economic invincibility and Wall Street has shown itself capable of getting carried away in recent months.