(Bloomberg) -- When earnings season kicked off for Corporate America this month, all eyes were on whether the biggest US banks could deliver bullish enough outlooks to extend last quarter's rally in their shares.
They didn't, and the KBW Bank Index slumped to its worst losing streak since August. The gauge is trailing the broader stock market in January, even after surging Friday.
The lenders have given investors a bevy of mixed signals to digest. Many issued guidance for net interest income — a crucial source of revenue — to be lower this year amid questions around the pace of expected interest-rate cuts and the health of the economy. Credit quality is also showing signs of deteriorating. However, bankers expect investment banking will finally rebound.
Bank executives were tasked with boiling all that down into guideposts for the year ahead, no easy feat given how central the Federal Reserve's policy decisions in the coming months will be to the companies' performance in virtually all corners of their business.
“They're trying to kind of straddle between the Fed cutting multiple times as the forward yield curve is suggesting, and perhaps a more rational one or two cuts and then sort of see it play out,” said Christopher Marinac, an analyst at Janney Montgomery Scott who covers regional lenders including Truist Financial Corp. and Fifth Third Bancorp.
“They're trying to kind of hedge themselves, give conservative guidance with the idea that if they're wrong and it's higher, no one will mind.”
Judging by Wall Street analysts' price targets, the sector is poised to rise about 11% over the next 12 months, data compiled by Bloomberg show. That implied move has increased since the start of the year, as the shares declined and analysts revised their calls higher.
Fed Assumptions
The earnings reports featured a slew of nonrecurring issues, such as assessments to refill the FDIC's coffers following last year's bank failures. Those one-time items amounted to billions of dollars in total across the largest firms.
The noise pushed investors to lean even more on the firms' guidance for the year ahead. And with the path of rates a key uncertainty, projections for net interest income — the measure of what banks make on loans versus what they pay for deposits — were particularly in focus, as were the assumptions the forecasts were built on.
Read more: US Big-Bank Revenue Looks Cloudy With Rates; Card Driving Credit
Wells Fargo & Co.'s guidance, like many peers, cited the forward rate curve as of early January as an input. PNC Financial Services Group Inc., meanwhile, said it expects the Fed to stay on hold through mid-year, with a mild recession starting around then, and 75 basis points of easing for 2024. Citigroup Inc. is factoring in three to six rate cuts.
The market's stance has wavered in the past week, and reflects roughly a 50% chance the Fed starts cutting in March, with 2024 easing totaling at least 125 basis points. Fed officials anticipate 75 basis points of cuts this year.
“The perfect scenario for the group is probably two to three cuts in the back half of the year because inflation has come down, but it still is a soft landing,” said Keefe, Bruyette & Woods analyst David Konrad. “It feels like the market's saying soft landing and a lot of rate cuts, which seems contradictory, but we'll see.”
Deal Revival
A Fed pivot could prove a boon for another critical Wall Street business — investment banking.
There are growing expectations for a pickup in dealmaking, after a drought that weighed on earnings the past two years and spurred layoffs. Both Goldman Sachs Group Inc. and Morgan Stanley cited optimism around that segment.
Read More: Wall Street Banks See Investment-Banking Comeback on Fed Pivot
Of course, one of the key areas investors look to banks for is their view on lending and credit, as a reading into their view on the health of the economy and the American consumer.
JPMorgan Chase & Co. said that outside of credit card growth, loan growth is expected to stay muted. Citigroup said card net credit losses have risen back to pre-Covid levels. Meanwhile, credit-card issuer Discover Financial Services said its provision for credit losses more than doubled from a year earlier.
The finance industry's results continue next week, with reports from American Express Co. and Visa Inc.
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