The US stock market earnings season kicked off on Friday, with JPMorgan Chase and Wells Fargo, two major Wall Street banks, leading the way in releasing earnings reports that exceeded analysts' expectations. Analysts believe that strong bank earnings may indicate that the US economy has achieved the so-called "soft landing." Analysts also stated that under the premise of a rate-cutting cycle and the realization of a soft landing, financial stocks often perform well.

JPMorgan Chase and Wells Fargo: Increased consumer spending willingness, soft landing may have been achieved

JPMorgan Chase stated on Friday that the US economy remains robust for consumers and large companies, indicating that the Federal Reserve may have achieved the widely discussed "soft landing," which means maintaining healthy economic growth while reducing inflation.

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JPMorgan Chase's earnings report showed that even with the Federal Reserve's rate cut in September, the bank's net interest income for the third quarter continued to exceed expectations, and the full-year revenue forecast was raised. Executives stated that consumers continue to spend, and large companies are confident, which is the economic state that the Federal Reserve has always hoped to achieve.

"These results are consistent with a soft landing scenario," said Chief Financial Officer Jeremy Barnum in a conference call. "They are quite consistent with this just-right economic condition."

Analysts believe that the recent rate cuts by the Federal Reserve need time to take effect in the banking system, and most analysts expect bank interest income to decline. However, JPMorgan Chase's performance on Friday exceeded expectations.

However, the situation is not entirely optimistic. For example, deposit balances have decreased, and JPMorgan Chase stated that it expects an increase in loan losses in the credit card division, indicating that some consumers are facing increasing financial pressure. JPMorgan Chase's profits fell by 2% to $12.9 billion, but the results were better than expected due to increased interest income. This decline was mainly due to the increase in credit card loan losses. Revenue increased by 7% to $42.6 billion.

Overall, JPMorgan Chase's customers continue to use credit cards for consumption, and users' credit card debts are increasing. Although it is expected that credit card loan losses will rise, executives stated that there is not much to worry about."Consumer conditions are good and remain relatively strong," Barnum said.

JPMorgan Chase CEO Dimon also stated on Friday that despite signs that the Federal Reserve has successfully achieved a "soft landing," he remains cautious about the future of the economy.

"While inflation is slowing down and the US economy still has resilience, there are still several key issues, including huge fiscal deficits, infrastructure needs, trade restructuring, and the resurgence of regional conflicts, which may or may not have a significant impact on the economy. Although we hope for the best, these events and current uncertainties indicate that we must be prepared for any environment."

Wells Fargo Chief Financial Officer Mike Santomassimo also said on Friday that consumer spending has slightly receded, and low-income customers are facing difficulties, but the overall situation remains robust.

"Consumers with low income or wealth levels are still the most nervous and stressed group," he said.

Wells Fargo's financial report shows that the bank's profit decreased by 11% in the third quarter, to $5.11 billion, due to the increased financing costs of customer deposits. The bank slightly lowered its forecast for full-year net interest income. However, its profit is still higher than expected.

Analysts: Interest rate cuts, soft landing, financial stocks perform well

Data shows that Wall Street is waking up from a long-term slump caused by rising interest rates, but trading volume has not yet reached the level of 2021, when monetary policy relaxation drove a peak year of mergers and acquisitions and capital market activities.The impressive earnings of JPMorgan Chase and Wells Fargo, along with positive comments on consumer health, led the KBW Bank Index to rise as much as 3.4%, reaching its highest point since April 2022. Wells Fargo led the index with a gain of up to 6.9%, reaching its highest level since July. Meanwhile, Bank of America, JPMorgan Chase, Zions Bank, and Western Alliance Bank all saw increases of over 3.5%. Wells Fargo, Bank of America, and JPMorgan Chase were also among the top gainers in the S&P 500 Index.

Apollo Global Management analyst Torsten Slok told the media on Friday that financial stocks tend to perform well when the Federal Reserve's interest rate reduction cycle ends and a soft landing is achieved. Slok analyzed the total returns of various industries during two interest rate reduction cycles that did not overlap with economic recessions, which were from July 1995 to January 1996 and from September 1998 to November 1998.

TD Cowen's Moshe Orenbuch stated that the performance of various banks indicates that "credit card spending remains resilient, and the growth in outstanding balances remains strong." He expects the loan loss guidance for 2024 to be "less than the expectations at the beginning of the year, as credit continues to normalize roughly as expected."

In addition, KBW analyst Jade Rahmani said that the signals from JPMorgan Chase and Wells Fargo about the distressed commercial real estate (CRE) industry confirmed his view that the CRE market is close to bottoming out, and "more positive phenomena are beginning to emerge." The evidence he cited includes the stable reserves against current expected credit losses for both banks, the increase in JPMorgan Chase's CRE banking revenue, the reduction in Wells Fargo's CRE net loan charge-offs (mainly in the office building sector), and the growth in capital market revenue.

Rahmani added that stable credit trends could be a positive signal for commercial mortgage real estate investment trusts (REITs), and Wells Fargo's growth in CRE capital markets would be beneficial for CRE brokers.