The Dow Jones Industrial Average gave up nearly 143 points today, as earnings season kicked off and investors continued to mull future interest rate hikes and what a potential recession might look like.
Yesterday, new data for the Consumer Price Index (CPI), which tracks the prices of many common goods and services, and serves as one gauge of inflation, showed that the CPI had risen 9.1% in June on a year-over-year basis. That was more than economists had been expecting and showed that inflation stayed hot last month.
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Now there is talk that the Federal Reserve might consider raising its benchmark overnight lending rate, the federal funds rate, by an entire percentage point later this month. Investors were already suspecting a 0.75% hike after the CPI report. Rising interest rates increase the possibility of a recession because they tend to tighten consumers' finances and slow business activity.
Earnings season did not exactly get off to the best start today, which is why several companies in the Dow that either reported earnings or will soon report earnings saw their stock prices decline.
Financials get off to a bad start
As it always does, JPMorgan Chase (JPM 2.51%), the largest bank in the U.S. by assets, formally kicked off second-quarter earnings season. After the bank reported earnings and revenue that missed analyst estimates and then suspended share repurchases for the time being, shares of the bank fell roughly 3.5% today.
In particular, JPMorgan reported softer investment banking results than the Street had been anticipating. Nobody expected a good quarter, given the lack of initial public offerings and other issuances, but revenue in investment banking fell short of expectations.
Despite the disappointing quarter, however, JPMorgan Chase didn't see any real signs of a recession in the second quarter, which ended in June. Loan losses are still near historic lows, the consumer is still spending, and credit card and commercial lending balances rose nicely in the quarter.
After the JPMorgan report, shares of the large investment bank Goldman Sachs (GS 0.22%) sold off, as investors expect trends seen at JPMorgan to be present when Goldman reports earnings on July 14. Shares of Goldman fell nearly 3% today.
While Goldman has been working to diversify its earnings more into consumer banking and asset and wealth management, it still derives the bulk of its revenue from investment banking and trading. JPMorgan's trading businesses performed well during the quarter.
The biggest loser in the Dow today came from the insurance giant Travelers (TRV 1.74%), with shares falling nearly 4.7%. Travelers will report earnings on July 21. The company has had a great year, with the stock virtually flat in 2022, widely beating the broader market, but investors certainly seemed spooked today after the first few earnings reports.
Should you be worried about bank stocks?
While it's never good to miss earnings estimates, I am bullish on stocks like JPMorgan and Goldman -- especially JPMorgan -- while they trade at lower earnings multiples. Both have built sufficient levels of capital to get them through a recession and should benefit from rising interest rates.
The investment banking picture can be a bit trickier to predict, but I imagine that events like IPOs will bounce back once the market settles down a bit.
There is likely more volatility ahead, considering the large rate hikes expected. But the volatility may start to die down later this year or early next, once investors can get a clearer line of sight regarding what lies ahead for the economy.
