Some of the biggest US banks including JPMorgan (NYSE: JPM), Bank of America (NYSE: BAC), and Citigroup (NYSE: C) are breaking out to new, all-time highs. This is another development that is inconsistent with the looming recession narrative. Compare this to previous recessions in 2007 and 2000, when big banks were underperforming the broader indices.
Some of the catalysts for the strength in bank stocks are strong earnings results, the steepening yield curve, and marginally improved growth picture for the U.S. economy. As a group, financials topped out in early 2018, forming a lower high in October 2018. This proved to be a useful indicator of deeper market stress as the S&P 500 (SPY) plunged more than 20% over the next two months.
Bigger Picture
Rather than entering recession, periods of new highs and outperformance in big banks are more consistent with upturns in the business cycle even within the confines of a bull market as it marks a transition period from positive but decelerating growth to accelerating growth. Investors should consider this narrative as it's consistent with weaker backward-looking indicators and more bullish forward-looking indicators.
Economic and market conditions have significantly improved since last year. Entering 2019, the Federal Reserve was hawkish, as it raised rates four times over the past year, and trade tensions were escalating as tariffs were set to be implemented. These variables translated into a flattening yield curve.
Today, the situation is much more constructive. The Fed is dovish, as it looks set to cut rates this week for the third time. Looking farther, it seems unlikely that the Fed is going to raise rates anytime soon especially given the upcoming election. Trade tensions are dissipating with the potential for a 'Phase 1' deal being signed soon amid discussions of tariffs being lifted. Similarly given the upcoming election, it's in President Donald Trump's interests to sign some sort of agreement and certainly not to increase uncertainty given the stakes.
Strong Earnings
JPMorgan's third quarter results were particularly strong and showed that the bank's revenues continue to grow and diversify. Its results also affirm that the consumer is in a good place especially as default rates remained low.
It reported record third quarter revenues of $29.3 billion and $9.1 billion in earnings an increase of 8% in both measures from last year. Thus, the stock's gains so far are largely earnings-driven. Valuations remains quite reasonable with a price to earnings ratio of 12.5.
Big banks are breaking out to new highs, powered by strong earnings and improving economic and financial conditions. Given the upcoming election, President Trump's incentives to win reelection, and the Fed's recent shift from hawkish to dovish, it seems likely that these favorable conditions will persist at least for the next few months.