What We're Seeing: Bank Earnings Push Records – 8 July 2024

The Week in Brief

Stocks continued climbing last week, with July 12 marking another milestone. The S&P 500 and Dow closed at record intraday highs, fueled by strong second-quarter earnings from major banks and renewed bets on Fed rate cuts.

JPMorgan and Citi led the way, reporting results that exceeded expectations. The earnings strength was broad enough to lift sentiment across the market. Perhaps more notable was the action in smaller stocks: the Russell 2000 surged to its best levels since 2022, signaling that the rally is no longer confined to mega-caps.

Sector and Style Action

Apple, NVIDIA, and other tech heavyweights bounced back, contributing to the index gains. After cooling off in late June, the Magnificent Seven found their footing again. The interplay between growth and value continues, with both styles participating in the advance.

Financials lagged slightly despite the strong earnings, as investors had already bid up the sector in anticipation. This is a classic case of buying the rumour and selling the news. The underlying fundamentals for banks remain solid, with net interest margins benefiting from higher rates.

Fixed Income Dynamics

Treasuries sold off modestly, with the 10-year yield hovering around 4.5%. The Fed signaled at its last meeting that only one cut is likely this year, pushing back against more aggressive easing expectations. Despite the higher yields, equity gains offset the drag for now.

The bond market is in a holding pattern. Until inflation data provides clearer guidance, yields are likely to range-trade. The next CPI release will be closely watched.

Our Read

The breadth of this rally is encouraging. When small caps outperform and bank earnings beat expectations, it suggests the economic expansion is healthy. This is not a flight to safety or a narrow tech-driven move. It is a genuine broadening of participation.

We remain constructive on equities. The earnings season is off to a good start, and the macro backdrop, while not perfect, is supportive. Growth is holding up, inflation is moderating, and the Fed is in no rush to tighten further.

For positioning, we continue to favour a balanced approach. Tech exposure makes sense given the structural tailwinds, but we are also adding to small-cap and value positions that benefit from economic resilience. Banks look attractive for investors seeking exposure to the rate cycle.

What Could Change Our View

The Fed’s hawkish tone is a constraint. If policymakers push back harder against rate-cut expectations, it could weigh on valuations, particularly for growth stocks. We would also reassess if bank earnings start to show stress in loan portfolios. For now, the trend is intact.

This is informational commentary, not investment advice.