Bankrapporter är nyckeln till fortsatt börsrally

The S&P 500 index and Nasdaq Composite keep hitting new highs. But the stock market’s rally now depends on what second-quarter earnings and the next round of inflation figures look like.

Earnings season gets started this coming week with PepsiCo and Delta Air Lines reporting on July 11, and then the big banks on July 12, with JPMorgan Chase, Wells Fargo, Citigroup, and Bank of New York Mellon releasing results. Analysts are predicting earnings growth of 8.8% for the S&P 500 in the second quarter, according to estimates from FactSet, but the financials are only expected to post a 4.3% increase.

Of course, investors care more about the future and will be watching what demand for consumer and business loans looks like in the face of higher-for-longer interest rates and sticky inflation. There are encouraging signs. Analysts forecast a more than 40% jump in earnings for the financial sector in the fourth quarter and healthy growth in the first half of 2025.

Financial stocks are starting to look more compelling, says Michael Cuggino, president of the Permanent Portfolio Family of Funds. But investors should err on the side of caution, he says, and look for companies that generate a decent chunk of revenue from fee-based businesses and not just spread income on loans.

“Financials are interesting, but you have to be a little careful,” he says. “I like companies with a more diversified portfolio of businesses,” noting that he owns Morgan Stanley, Charles Schwab, Visa, and State Street.

Beaten-up regional banks, which have been hit due to concerns over the rapid drop in the value of commercial real estate loans, could be tempting too. The SPDR S&P Regional Banking exchange-traded fund is down 7% in 2024 and trades at 11.6 times earnings estimates, compared with a price/earnings ratio of 16 for the Financial Select Sector SPDR ETF. Even though there were several regional bank failures in 2023—and the near collapse of New York Community Bancorp earlier this year—large regional banks still have healthy balance sheets.

John Mowrey, chief investment officer of NFJ Investment Group, argues that banks with good credit quality in economically strong markets in the Southeast and other Sunbelt states should hold up well. He owns superregionals PNC Financial Services Group, Truist Financial, and U.S. Bancorp, and smaller Texas bank First Financial Bankshares . “Regional loan exposure matters,” Mowrey says. “These banks are connected to strong microeconomics throughout the U.S.”

Just how strong is the broader economy, though? The June jobs report showed signs that the labor market is softening. Investors (and the Federal Reserve) will also be keeping close tabs on the June inflation numbers. If the core consumer-price-index and producer-price-index figures, which exclude food and energy, continue to drift closer to annualized rates of 3%, it would boost the odds of an interest-rate cut this year.

Cindy Beaulieu, chief investment officer of Conning North America, says the Fed could cut rates in December. A cut may come even sooner. After the June jobs report, traders were pricing in a 75% probability of easing at the Fed’s September meeting. Stocks could be choppy over the next few months as investors wait for more clarity about inflation. But that might be a good thing.

“You have to be poised for more volatility, but that could create an entry point,” Beaulieu says. “If you get a pullback, there could be a buying opportunity.”

And who knows? The rally may finally be about to broaden out from Big Tech after all.