After years trailing behind its biggest rival, Morgan Stanley’s stock did something it hasn’t for years yesterday—it overtook Goldman Sachs in market cap. After a stock gain yesterday, combined with a GS fall, Morgan Stanley’s valuation is now $86.40 bn, ahead of Goldman’s $85.88. The bank’s fixed income division has been surging of late, boosting sentiment amongst investors. Goldman’s FICC division has been headed in the exact opposite direction, with a steep fall in their most recent quarterly earnings.
FINSUM: James Gorman has done a great job steering Morgan Stanley and boosting their ROI. We like the overall direction of the bank.
There have been a lot of worries about bank earnings over the last couple of weeks. The market has been flooded with articles about bored Wall Street traders with nothing to do and a flurry of analyst earnings downgrades on the back of lower expected trading revenue. However, JP Morgan released its earnings Thursday and things were not nearly as bad as many expected. Profit per share was up significantly over last year and revenue was well ahead of expectations. Trading was weaker than in previous quarters, but on the whole the stock rose 1.5% as earnings were better than expected.
FINSUM: So the opinions that universal banks would be better off seem to be vindicated thus far. It will be interesting to see how Goldman Sachs, which is not universal, fares.
Expectations for bank earnings have been plunging as the realization of low volatility hurting trading revenues settled into the minds of Wall Street analysts. However, not all banks will be affected equally, and those with big consumer facing businesses should be the most insulated. Therefore, big universal banks like JP Morgan and Citigroup might have the most favorable looking stocks heading into this earnings season. Goldman Sachs, in particular, is supposed to have weak earnings because of its outsized exposure to commodities, which had a rough quarter.
FINSUM: We do not think it is going to be a good earnings season for banks overall, but universals look less likely to take big hits.
There has been some speculation lately that banks may be set for poor earnings in the second quarter. Anecdotal evidence suggests that may be true. Bloomberg has run an article saying that traders all across Wall Street are bored at their desks. They are leaving work early for kids’ sports games, flipping through Tinder profiles, or otherwise wasting time because a lack of work. Bloomberg summarizes the situation this way, saying “Behind the scenes, traders grouse about a lack of market-moving news. Congressional gridlock is eroding optimism that President Donald Trump can enact a sweeping, pro-business agenda. Other geopolitical frictions have yet to jolt markets. The Federal Reserve is sticking to its interest-rate path.”
FINSUM: This is about as a good an indicator about trading revenue as you can have. The second quarter could see a bigger revenue miss than many are expecting.
The CFPB, or Consumer Financial Protection Bureau, the all-encompassing whip lead by Senator Warren, has a new proposal that has American banks bristling. The CFPB has put together a proposal that would do away with banks’ ability to make customers sign contracts that force them to settle legal claims in an out-of-court arbitration process. If enacted, the move would make it much easier for US consumers to sue their banks. The industry hates the idea as they say it could raise litigation costs by billions of Dollars.
FINSUM: Given banks behavior leading up to the Financial Crisis, it is hard to believe they maintained this protection for so long. Trump may step in on this one though…