Making sense of the markets this week: January 22, 2023

Wall Street investment banking is out, Main Street consumer banking is in

In 2021, we saw the world of investment banking and trading rake in record profits. And banks that derive much of their revenue from those verticals, such as Goldman Sachs (GS/NYSE), were quite happy with the results. A year later, that momentum has decisively changed. Our first look at corporate earnings in 2023 reveals that boring-old consumer banking might be back in style, while investment banking isn’t nearly as profitable as it used to be. (All figures are in U.S, currency in this section.)

Positive surprises

• Bank of America (BAC/NYSE): Earnings per share of $0.85 (versus $0.77 predicted). Revenue of $24.66 billion (versus $24.33 billion predicted.) 
• JP Morgan (JPM/NYSE): Earnings per share of $3.57 (versus $3.07 predicted). Revenue of $35.57 billion (versus $34.3 billion estimate). 

Neutral results

• Morgan Stanley (MS/NYSE): Earnings per share of $1.26 (versus $1.19 predicted). Revenues of $12.99 billion (versus $13.3 billion predicted).
• Citigroup (C/NYSE): Earnings per share of $1.10 (versus $1.14 predicted). Revenues of $18.01 billion (versus $17.90 billion predicted). 

Negative surprises

• Goldman Sachs (GS/NYSE): Earnings per share of $3.32 (versus $7.69 predicted). Revenue of $10.59 billion (versus $10.83 billion predicted). 
• Wells Fargo (WFC/NYSE): Earnings per share of $0.67 (versus $0.72 predicted). Revenues of $19.66 billion (versus $19.98 billion predicted). 

It’s tough to find the through line, in terms of the overall story here, when it comes to the earnings season for these banking conglomerates. But it’s fair to say the most pessimistic predictions were largely proven incorrect.

Goldman Sachs did have its biggest earnings miss in a decade, and it announced to cut 3,200 employees. However, Bank of America and JPMorgan rode consumer banking strength to earnings beats and announced they were still “in hiring mode.” Relative to where they were a month ago, here’s the market reaction to the banks’ earnings announcements was:

• Bank of America (BAC/NYSE): Up 3.23%
• JP Morgan (JPM/NYSE): Up 3.11%
• Morgan Stanley (MS/NYSE): Up 10.56%
• Citigroup (C/NYSE): Up 12.69%
• Goldman Sachs (GS/NYSE): Up 1.82%
• Wells Fargo (WFC/NYSE): Up 4.81%

Wells Fargo’s earnings are a bit of a one-off result—thanks to paying $2.8 billion in after-tax operating loss because of legal and regulator costs in connection with customer abuse penalties.

While provisions for expected loan losses were up (cutting into the banks’ bottom lines), the overall message coming out of this early earnings season appears to be that someone forgot to tell consumers that they were in a recession. 

While setting funds aside to balance out loan defaults might sting investors in the short term, it’s a prudent move in terms of overall stability. If those losses don’t materialize, shareholders will see money flow back onto the balance sheet at a more stable point in the future.

Netflix surprises experts, and P&G does not

The Thursday number that had Wall Street watchers tuning into Netflix (NFLX/NASDAQ) was 7.66 million. That’s the number of paid subscribers that the service added since it launched in November. Those subscribers blew away the 4.57 million consensus prediction, and it bodes very well for the long-term revenue potential of the company, especially when you factor in the new advertising tier. (There’s a cheaper package for customers that includes commercials.)  

The subscriber number seemed to be so important that investors largely ignored the fact earnings per share came in at $0.12, which is substantially below the $0.45 predicted. Currency movement was blamed for the lower-than-expected earnings, and this isn’t considered a long-term issue for the streaming company. Share prices were up in after-hours trading after the earnings announcement on Thursday.