Just a few days into the current earnings season and already, the top five US banks have reported a remarkable earnings rebound.

Net income for these five firms came in at US$23.2 billion in Q3, which is more than triple the figures reported for Q2. This profit recovery appears to be happening at a faster clip compared to the two years it took for major lenders to stage an earnings recovery during the Global Financial Crisis.

Yet, markets don’t seem to care.

The S&P 500 has shed 1.29 percent over the past two days, with the financials sector being the worst performing sector on the US benchmark index for the period. The S&P 500 Financials index has fallen 2.91 percent over Tuesday and Wednesday combined. On a year-to-date basis, financial stocks are still lower by 19.52 percent, beating only energy stocks which are almost nearly 50 percent lower compared to where they were at the start of 2020. This despite the S&P 500 itself being up nearly eight percent so far this year. At the time of writing, the S&P 500 Minis point to further losses at the Thursday open, although the FXTM Trader's Sentiments remain net long on this instrument.

The price movements of banking stocks do not correlate with what’s being reported out of Wall Street Banks, which once again demonstrates the notion that fundamentals hold very little sway in today’s markets. Despite these major financial institutions proving their ability to generate earnings even amid a pandemic and a recession, investors are hardly flocking to financial stocks at the moment. Even after Goldman Sachs reported a record earnings per share of US$9.68, which was nearly double of what markets had predicted, yet the bank’s stock only managed a meagre 0.2 percent increase on Wednesday. 

Perhaps investors are wary that the US$50 billion in loan loss provisions will eventually have to all be used up in the not-so-distant future. Already major corporations have announced more layoffs are set to happen in the remainder of the year, which could drive up the number of loan defaults.

The US weekly jobless claims data due later today would offer another signal over the state of the jobs market. Markets are expecting 825,000 initial jobless claims in the past week, with about 10.5 million Americans still receiving unemployment benefits. Should the unemployment rate start to tick up from September’s 7.9 percent in the absence of more US fiscal support, that could weigh negatively on US banking stocks, which are seen as a proxy to the overall health of the US economy.

Next up is Morgan Stanley, which is due to announce its Q3 results before US markets open on Thursday. Perhaps even a positive earnings surprise may not have a desired impact on Morgan Stanley’s shares, given how markets have scarcely reacted to the positive results from Morgan Stanley’s larger peers in recent days. Morgan Stanley remains some 12 percent lower compared to its 2020 high.


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