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The stock market exhibited robust gains on Wednesday, with the S&P 500 (^GSPC 1.40%) climbing by 1.6% and the Nasdaq Composite (^IXIC 1.90%) rising by 1.9% as of 10 a.m. ET. Leading this upward trend were several major banking stocks, particularly Wells Fargo (WFC 6.11%), Goldman Sachs (GS 4.91%), and Citigroup (C 6.49%), which all surged by more than 5% during the day.
Two primary factors are contributing to the impressive performance of these bank stocks.
Impressive Earnings Reports
First, the fourth-quarter earnings season for 2024 commenced on Wednesday, revealing unexpectedly strong results, particularly from these three key financial institutions.
Wells Fargo reported revenues that fell short of analysts’ predictions, yet it exceeded earnings expectations significantly. A notable revelation from the consumer-centric bank is its forecast indicating that net interest income in 2025 will exceed that of 2024. Despite its substantial income from consumer banking, Wells Fargo is increasingly seeing investment banking as a key growth driver, with fees in this sector rising by an impressive 59% year over year in the most recent quarter.
Goldman Sachs delivered strong results, outperforming estimates on both earnings and revenues. Its net income nearly doubled when compared to the same quarter in the previous year. Notably, Goldman’s performance in trading exceeded expectations on both equity and fixed-income fronts, while investment banking revenues aligned with forecasts. The asset and wealth management segment also showed resilience, with an 8% revenue increase, contrasting with analyst predictions of a slight downturn.
Citigroup’s results were equally impressive, as it not only surpassed earnings forecasts but also announced a substantial $20 billion stock buyback, equating to approximately 14% of its market capitalization. The financial health of Citi appears strong across both consumer and investment banking sectors, highlighted by a 35% year-over-year rise in investment banking revenue and a remarkable 36% increase in trading revenue.
Positive Inflation Indicators
The second factor propelling the surge in bank stocks was favorable inflation data. In recent years, major banks have faced challenges with their net interest margins due to escalating interest rates. This pressure is primarily due to the rising costs associated with deposits and other capital sources outpacing the returns from loan portfolios.
This week, investors received encouraging news, initially with the Producer Price Index (PPI) showing much lower figures than anticipated. This was followed by the core Consumer Price Index (CPI) for December, which reported a year-over-year increase of 3.2%, slightly below the expected 3.3%.
The implications of a lower-than-expected inflation rate are significant. If the Federal Reserve perceives this trend, it may opt to lower interest rates more aggressively than currently anticipated. Such a shift could serve as a substantial boon to bank profitability in 2025 and beyond.
Source
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