Anticipated Drop in U.S. Inflation, Peak Earnings from Major Banks, and Regulatory Changes: A Mixed Bag for Investors
July 9, 2023
The imminent release of the June CPI report on U.S. inflation is expected to land squarely in the hands of investors this Wednesday. Economists are predicting a decrease in headline inflation from 4.0% in May to 3.0% and a marginal drop in core inflation from 5.3% to 5.0%. Any unexpected figures in the CPI could alter projections about the Federal Reserve’s next moves. As of the time of writing, traders anticipate a 90% chance of the Federal Reserve increasing rates by 25 basis points during the meeting scheduled for July 25-26.
Impact of the Earnings Season
The earnings season is set to begin with the release of financial results from major banks like JPMorgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C). These banking giants’ revelations regarding deposit flows and loan growth could influence the stock performance of regional banks. However, some market analysts caution that large banks’ earnings may have reached their peak as net interest income is expected to continue its downward trend. This, coupled with gradually normalizing and increasing credit costs, as well as inflation-induced expenses, may exert downward pressure on earnings.
Banking Sector Adjustments and Predicted Regulatory Changes
Banks are also grappling with potential EPS growth impairment as they brace for probable regulatory changes. This anticipation has led them to boost liquidity, increase debt capital, and in some cases, hold off on share repurchases.
Earnings Outside the Banking Sector
Aside from the banking industry, other companies set to release their financial performance figures include Delta Air Lines (DAL), UnitedHealth Group (UNH), and PepsiCo (NASDAQ:PEP). The overall earnings season is expected to present mixed results, with 62 S&P 500 companies issuing negative EPS preannouncements against 39 positive. According to the London Stock Exchange Group, this results in an N/P ratio of 1.6 for the S&P 500 Index, which is significantly lower than the long-term average of 2.5 and the prior four-quarter average of 2.0.