Second-quarter earnings season is underway with some big banks having already delivered earnings results during the opening week of July and kick-starting the earnings period for the financial sector.
Though the second quarter has largely been driven by tumultuous geopolitical tension, which in turn has caused some volatility in the market, investors remain bullish over wider macroeconomic recovery on the back of softening inflation, which could help support the Federal Reserve's decision to lower interest rates in the coming weeks.
However, not all has been well on the market. In April, U.S. production and manufacturing output declined 0.3% from the month before, reversing the previous months' growth. Declines were mostly attributed to rising materials and labor costs.
During the second quarter, unemployment continued to rise, with employers adding over 653,000 new jobs from April to June. Despite seeing improvements, unemployment levels for June came in at 4.10%, up from 4% in May and 3.90% in April.
It has been an eventful quarter, to say the least, and the remaining leg of the year could hold many more challenges, and perhaps a few underlying opportunities for investors should they play their cards right.
For now, here's what we can expect in the remaining weeks of earnings season:
U.S. banks drive positive openBanks opened the earnings season, with most U.S. banks having already delivered results, most of which have posted impressive gains despite wider economic challenges, including subdued demand for new loans and margin pressure as interest rates remained elevated for much of the second quarter. In total, the financial sector is expected to deliver 10.70% earnings growth, with the banking sector expected to see 7% earnings growth improvement.
The largest of big banks, JPMorgan Chase (NYSE:JPM) delivered seemingly impressive second-quarter results, posting a 10% improvement in market revenue of $7.80 billion, while markets and securities revenue climbed by 8% to $9 billion. Banking and wealth management fell by 5%, while investment banking fees skyrocketed by 50%.
Bank of America (NYSE:NYSE:BAC) managed to hold a top position despite profits slipping 6.90%, and posting a profit of 83 cents a share. Net interest continued to decline on the back of higher interest rates, while revenue climbed below 1% to $25.52 billion. Others, including Citigroup (NYSE:C), Wells Fargo (NYSE:NYSE:WFC) and Goldman Sachs (NYSE:NYSE:GS), posted better-than-expected revenue and profit, helping to rebound Wall Street sentiment.
Big tech earnings: Is there still steam left?The tech sector is potentially facing a slowdown in activity, so might see slower spending in ad revenue as companies pull back on advertising spending against the backdrop of slower consumer spending.
For one, Meta Platforms (NASDAQ:META) could be in the direct line of fire of seeing its advertising revenue decline, with analysts expecting the company to post weaker ad revenue while maintaining elevated spending on other segments such as artificial intelligence and virtual reality.
Wall Street sweetheart Nvidia (NASDAQ:NVDA) could post another strong quarter as investors have sharply increased their exposure to the company following the recent stock split, which could help provide significant support for new investors. However, some analysts argue that Nvidia could face wider issues should the chip sector see declines in the coming months, however, this isn't yet certain.
Maker of the iPhone, Apple (NASDAQ:AAPL) kept investors on the edge of their seats following the announcement that the company will now begin developing plans to include AI in their iOS operating system. AAPL gained 2.58% after the announcement before sliding back down again.
Positive bets on near-term rate cutsAll eyes were on the Federal Reserve in the second quarter as interest rates remained planted at a 23-year high. The central bank has remained tight-lipped about when they are likely to begin bringing rates down, but recent data suggests cooling inflation and slower economic activity are falling in line with the bank's expectations.
Nearly everyone is now certain the Federal Reserve will announce a rate cut during its meeting in September. According to readings by the CME FedWatch tool, there is now a 93.30% odd chance that the Fed's target fund range will be lowered from 5% to 5.25% in September.
While many initially expected there to be more than one rate cut this year, analysts are now on the fence about the possibility of seeing another cut later in the year. There's a roughly 6.70% odds that rates will come down by half a percentage point in September, while some believe this might already happen by the end of July after the Fed's upcoming meeting.
Inflation keeps falling. How long to go?Inflation is falling, and for the first time since the pandemic prices have dropped by 0.10% in June compared to the month prior. Overall, inflation is now beginning to edge closer toward the Fed's 2% benchmark target.
In June, the Consumer Price Index slowed again, with the annual inflation rate standing at 3% compared to the reported 3.30% in May, according to fresh data released by the Bureau of Labor Statistics.
Major categories such as food and consumables rose 2.20% in June (not seasonally adjusted) and energy prices were up 1% (not seasonally adjusted).
Analysts expect core consumer inflation to continue a gradual decline over the next two quarters, with the expectation of reaching that 2% benchmark during the first quarter of 2025. PCE inflation is expected to average around 2.40% for the year, falling to 1.80%, below the Fed's 2% mark in 2025 through 2028, according to Morningstar estimates.
Small-cap havenU.S. small-cap stocks are having their moment in the sun this summer as some companies have undergone a reversing of leadership, which in return has helped the U.S. Small Cap Index gain 4.62%.
Elsewhere, the Russell 2000 Index has gained nearly 10% since the turn of the year, seeing a jump of 11.54% between July 9 to July 16. What's more, the Russell 3000 Index has reported an improvement of over 15% since the beginning of the year, with gains of 4.70% throughout the second quarter.
Fueled by falling inflation and the possibility of rate cuts, investors are jumping to take hold of under-leveraged corners of the market, which has helped drive the current market rotation. More than this, the unlikely possibility of a recession being curbed has also helped put more steam in the engines for small-cap stocks in recent months.
Though challenges remain, investors are certain that current conditions will help push small-cap stocks back into the spotlight for much of the upcoming quarter. While other financial vehicles, including bonds and historical CD rates, remain on Wall Street's radar, the current market sentiment holds a bullish tone toward the direction of small and medium-cap stocks.
Closing thoughtsThough there has been nothing out of the ordinary during second-quarter earnings season, upcoming events, including a possible rate cut, inflation data for July and the long-term prospects of the White House possibly seeing a new candidate taking the top job could bolster Wall Street sentiment, driving active market sentiment and helping to push investors into new corners as the market begins to swing in a new direction.