Speaker 1: Bloomberg Audio Studios, podcasts, radio news, The.
Speaker 2: Stock Movers podcast, your roundup of companies making moves in
Speaker 2: the stock market, harnessing the power of Bloomberg Data.
Speaker 1: I'm Tim Steeveek along with Katie Greifeld. Let's take a
Speaker 1: look at some stocks on the move. Big banks reported earnings.
Speaker 1: There was a theme market volatility sparked by the trade war,
Speaker 1: leading to record quarters for traders. Goldman Stock Traders posted
Speaker 1: the largest revenue hall in Wall Street history, Morgan Stanley's
Speaker 1: Stock Traders scored their best second quarter on record, and
Speaker 1: Bank of America Traders also posted a record second quarter.
Speaker 1: Watching all of this closely, Ken Leon, director of Equity
Speaker 1: Research CFRAA Research He joins US from Florida. So record
Speaker 1: quarters for trading across the board, yet the stock reaction
Speaker 1: to the downside.
Speaker 2: Why is that?
Speaker 3: When you look at the global US banks, they performed
Speaker 3: very strongly. What we did see was not only trading,
Speaker 3: but the elevated markets means that fee income across many
Speaker 3: different businesses like acid management, wealth management, other services generated
Speaker 3: substantial year over year growth. What we are also seeing
Speaker 3: is how the capital markets can be the delta for
Speaker 3: getting stronger growth and also higher estimates expected from the
Speaker 3: street looking ahead, both for revenue and earnings. Those that
Speaker 3: are more balanced or exposed to main street America consumer
Speaker 3: and small business are likely to see much slower growth
Speaker 3: and some risk of kind of sluggish demand in the future.
Speaker 3: I think that's really the difference between the outside significant
Speaker 3: performance of Gold and Sechs, strong growth for Morgan Stanley,
Speaker 3: and then those that were kind of in between, where
Speaker 3: the JP Morgan's and then Bank of America which didn't
Speaker 3: fire on all cylinders. That's the difference.
Speaker 4: What is the driver of these financial shares? Is it
Speaker 4: the yield curve? Is actually the numbers that we get
Speaker 4: in the earnings report? Is it something else? Because I
Speaker 4: feel like I go through this puzzle at least four
Speaker 4: times a year when we got these earnings.
Speaker 3: Yeah, lucky for you, four times. For me, it's every day.
Speaker 3: And we've been overweighted the financial sector really since last November,
Speaker 3: and the large banks are in the top ten of
Speaker 3: that sector. And what we've seen even in the second
Speaker 3: quarter or year to day is tremendous performance more than
Speaker 3: two times the S and P five hundred for diversified banks.
Speaker 3: But that's not the point. The key point is where
Speaker 3: do they go from here. We think the delta not
Speaker 3: only for the rest of this year, but really these
Speaker 3: stocks are going to be priced on twenty twenty six.
Speaker 3: Earnings is going to be how they do into next year.
Speaker 3: Obviously two to four rate cuts, some easing on the
Speaker 3: regulatory framework, and then also some opening up in the
Speaker 3: capital markets for investment banking. That's going to help these
Speaker 3: banks when you look at them, you know, in terms
Speaker 3: of PE multiples or what Gina was talking about the
Speaker 3: overall market, they have to earn into these valuations or multiples.
Speaker 3: When we look at more conservative metrics, which a lot
Speaker 3: of bank analysts look at because they're a conservative lot,
Speaker 3: such as priced and net tangible book value, they're pretty expensive.
Speaker 3: But I think it's earnings growth and what that does
Speaker 3: in terms of confidence that they can still have upside
Speaker 3: over the next year or two. That's the key can.
Speaker 1: I'd be remiss if we didn't ask you about drama
Speaker 1: with regard to Fedhair J. Powell, the reports emerging that
Speaker 1: he would be fired by the president and the President
Speaker 1: was seriously considered doing that. We saw a market reaction
Speaker 1: from the equity side and from the fixed income side,
Speaker 1: and then we heard from the President who denied that
Speaker 1: he would do that imminently. Yet there are certainly concerns
Speaker 1: about the way that the President feels about the FED share.
Speaker 1: We all know that what would it mean for banks
Speaker 1: if this were to happen? Would it mean anything?
Speaker 3: So I'm a global director and I look at market
Speaker 3: soul over the world, and also when you look at
Speaker 3: the bond market and really the ten and thirty year treasury,
Speaker 3: the FED really matters. It's independence, the respect and responsibility
Speaker 3: of its two mandates for inflation and full employment. I
Speaker 3: just think this is color or drama. You know. J.
Speaker 3: Powell is highly regarded. And the other issue, of course
Speaker 3: is when his term is up next year, likely probably
Speaker 3: to retire, but he could stay on for a few
Speaker 3: more years as a governor.
Speaker 1: What would happen though if he were forced out?
Speaker 3: I don't see that scenario.
Speaker 1: The President has targeted the handling of the FED renovation.
Speaker 1: What if there's something there and he can push him
Speaker 1: out through that.
Speaker 3: So President Trump's going to get a dubvish FED chairman
Speaker 3: in part, nobody's really hawkish today. The data will suggest
Speaker 3: possibly a slower US economy rest of this year, which
Speaker 3: is why we're much more positive on the delta of
Speaker 3: the capital markets, not main street America to help large
Speaker 3: banks earnings. So we're just going to have to see.
Speaker 3: But you know, overall, you know fed's going to be independent,
Speaker 3: and you know, of course we're gonna get ray cuts
Speaker 3: either way.
Speaker 4: I have a thought as to what would happen to
Speaker 4: the banks if Jerome Power forced out. You would see
Speaker 4: a lot of volatility and the banks would probably trade
Speaker 4: it ken And that brings me back to all of
Speaker 4: these training records that we saw these for Goldman and
Speaker 4: then these bumper quarterers that the other big banks put up.
Speaker 4: Of course, we know what happened in April. We had
Speaker 4: Liberation Day at the start of the month, and then
Speaker 4: we had the walk back, and it seems like that
Speaker 4: was a big boost for these banks. And the question
Speaker 4: that comes about is how sustainable is that when you
Speaker 4: think about all of this revenue that's being made, how
Speaker 4: sustainable is that?
Speaker 3: It's not the trading. You really need to focus on
Speaker 3: financial sponsors, which are the large private equity firms. They're
Speaker 3: sitting on two trillion dollars of companies they own. They
Speaker 3: have to monetize in some way and also afford the
Speaker 3: investment bankers to get that job done. That's where I
Speaker 3: would really look as a delta that we haven't seen
Speaker 3: really in the numbers and size as it relates to
Speaker 3: mergers and acquisitions, equity underwriting or other forms of transactions.
Speaker 3: Look to lower rates making it more appealing to valuation
Speaker 3: for both public and private transactions. That's going to be
Speaker 3: a bonanza for the large banks.
Speaker 1: Ken Leon, director of Equity Research yet CFRA. Thanks so much. Ken.
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