Fed Rate Cut Bets Surge as Bank Earnings Season Heats Up

TLDR

• US stock futures rose Wednesday with Fed Chair Jerome Powell suggesting more interest rate cuts are coming after noting “downside risks to employment appear to have risen”
• Bank of America and Morgan Stanley are set to report Q3 earnings Wednesday following strong results from JPMorgan, Wells Fargo, Citigroup, and Goldman Sachs on Tuesday
• Analysts expect Bank of America to report earnings of 95 cents per share on $27.5 billion revenue, while Morgan Stanley is expected to post $2.08 per share on $16.69 billion revenue
• Major banks reported healthy consumer finances and booming dealmaking activity in Tuesday’s earnings, with wealth management businesses showing strong growth as stock markets surged
• Trade tensions between US and China escalated as President Trump considers new restrictions on China for not purchasing US soybeans, while a government shutdown continues with no end in sight

Bank of America and Morgan Stanley are scheduled to release their third-quarter earnings before markets open Wednesday. The two banks follow strong earnings reports from JPMorgan Chase, Wells Fargo, Citigroup, and Goldman Sachs released Tuesday.

Analysts project Bank of America will report earnings of 95 cents per share on revenue of $27.5 billion. Morgan Stanley is expected to post earnings of $2.08 per share on revenue of $16.69 billion, according to FactSet data. Both estimates reflect year-over-year increases.

US stock futures climbed Wednesday morning ahead of these reports. Dow Jones Industrial Average futures moved up 0.3 percent, while S&P 500 contracts added 0.4 percent and Nasdaq 100 contracts gained 0.5 percent.

Investment Banking Recovery

Bank of America Chief Financial Officer Alastair Borthwick indicated at an industry conference last month that investment banking fees likely increased between 10 and 15 percent for the quarter. Investors will watch both firms’ reports for evidence that capital markets activity has fully returned.

Tuesday’s earnings from other major banks showed a healthy picture of consumer finances. The reports highlighted booming demand for dealmaking and securities trading services. These are core business lines for Wall Street firms.

Both Bank of America and Morgan Stanley operate large wealth management divisions. These businesses are expected to report higher client assets as stock markets have surged. Citigroup reported net new investment assets jumped to $18.6 billion from $13.8 billion a year earlier.

JPMorgan’s client investment assets rose 15 percent to $1.2 trillion. This growth reflects the broader trend of increasing wealth management activity across the banking sector.

Trade and Government Issues

Markets faced headwinds Tuesday as US-China trade tensions escalated. President Trump said he is considering imposing new trade restrictions on China. The potential action stems from China not purchasing soybeans from the US.

The threat follows China’s fresh sanctions on five US subsidiaries of South Korean shipbuilder Hanwha. This back-and-forth has created uncertainty for investors tracking trade policy developments.

The federal government shutdown continues with no resolution in sight. The White House budget office is working to find ways to pay military members and law enforcement during the stoppage. Trump said he would release a list of federal programs marked for cuts this week.

The government shutdown has delayed the release of key economic data. This has left Wall Street hungry for insights into the economy. No major economic reports are expected Wednesday.

Citizens Financial Group and PNC Financial Services Group also report earnings Wednesday. Last month, PNC announced an agreement to acquire Colorado-based lender FirstBank in one of the year’s largest bank deals.

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