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Big Banks’ Big Moment

Market Update

07.10.2024

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What happened last week?

US

  • OpenAI’s newly completed fundraising round valued the startup at $157 billion, making it one of the biggest private companies in the world.
  • The US added far more jobs than expected in September.
  • Energy was the best-performing sector over the week, as oil prices picked up on news of increased tensions in the Middle East.

Europe

  • Eurozone inflation fell below the European Central Bank's target for the first time in three years.

Asia

  • China’s stock market entered a bull market, rallying more than 20% from its lows.

    Why It Matters

    ChatGPT-creator OpenAI pulled off what’s reported to be the biggest venture capital funding round of all time. With big-name backers including Nvidia and Microsoft, the company is set to invest in research, development, and more expensive computer chips. Now it’s true, the startup’s yet to turn its groundbreaking tech into cold, hard profit. However, as one of AI’s leading companies and with sales scaling up stat, OpenAI’s recent move from a non-profit to a for-profit model could put investors one step closer to reaping huge rewards.


    The US created 254,000 jobs in September, far more than the 150,000 expected. The unemployment rate dropped to 4.1% too, slightly lower than expectations. Those resilient employment figures will alleviate investors’ concerns about any potential recession. Plus, it’ll make it less likely that the Fed will pull out another jumbo rate cut at its next meeting in November. Meanwhile, wages actually increased slightly more than expected, and that’s a touch inflationary.

    Energy was the best-performing S&P 500 sector over the week, as news of increased tensions in the Middle East pushed up oil prices. That marks a change: for months, oil’s price has been under pressure. The slowdown in the global economy has weighed on demand.

    Plus, OPEC+ – a group of the world’s biggest oil-exporting nations and its allies – recently announced plans to increase production as early as December, plumping up supply and – all else equal – pushing down prices.


    Eurozone inflation fell to 1.8% in September, landing below the European Central Bank's (ECB’s) target for the first time since the middle of 2021. The central bank should be clear to cut interest rates for the third time later this month, then – as well as another potential trim in December. That relief can’t come soon enough for the region. The bloc’s September manufacturing purchasing managers index (PMI) – which measures the economic health of the sector – hit its lowest reading so far this year. Similarly weak readings in manufacturing PMIs were also seen in the US and China.


    October 1st marked the 75th anniversary of the People's Republic of China. The occasion was celebrated with the announcement of huge monetary and fiscal stimulus measures aimed at boosting its economy, stock market, and troubled property sector. Investors approved: a key index of Chinese stocks jumped over 8% on Monday – its best day in 16 years – and formally entered a “bull market” after rising 20% from its lows.

    This week’s focus: Big Banks’ Big Moment

    This earnings season will have the world tuning in. Well, at least the world’s most curious investors. The S&P 500 closed the September quarter at a record high, and that’s pushed investors’ expectations to lofty heights, too. That means companies that disappoint will probably receive harsh punishment. Just look at Nike: the stock fell 6% last week, after it canceled its forecasts for the year.

    S&P 500 companies are expected to pull up their profit for the fifth quarter in a row, with a predicted uptick of 4.6% versus the same quarter last year. For the year as a whole, analysts expect companies in the index to push up their profit by 10% this year compared to last, and by 15% in 2025.

    Investors will be tuning in when two of the biggest banks, JPMorgan and Wells Fargo, announce results on Friday. After all, banking has been one of the best-performing sectors over the last year. Banks have managed to keep the interest rates paid to savers held down, while hiking charges on loans like mortgages and credit cards to maximise their takings. At the same time, they’ve been enjoying high rates on the cash deposits held at the Federal Reserve (Fed). In fact, analysis from the Financial Times indicates that the US’s 4,000 banks made around $1 trillion from the Fed’s two-and-a-half-year era of high interest rates.


    However, banks’ share prices have lagged behind the broader market recently. Remember, the Fed implemented a jumbo half percentage point interest rate cut last month, and the central bank’s expected to trim them several more times over the next year. That’s making it harder to predict banks’ profit in the coming months – after all, while interest rate plays aren’t the only way they make money, they sure are a major profit driver.

    The Week Ahead

    On The Calendar

    •  Monday: EU retail sales (August), UK Halifax house price index (September), US consumer credit (August), Japan household spending (August).
    •  Tuesday: US NFIB Small Business Optimism Index (September). Earnings: Pepsico.
    • Wednesday: US FOMC minutes (September), Japan PPI (September).
    • Thursday: EU ECB minutes (September), US inflation (September). Earnings: Delta Air Lines.
    • Friday: UK GDP (August), UK industrial production (August), US consumer sentiment (October). Earnings: BlackRock, JPMorgan Chase, Wells Fargo.

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