US stocks hover near record highs as traders digest strong mega-cap bank earnings

NYSE traders
  • The S&P 500 stuck close to record highs as the first-quarter earnings season kicked off.
  • Goldman Sachs, JP Morgan Chase and Wells Fargo each turned in better-than-expected results.
  • Coinbase will make its trading debut on Wednesday.
  • See more stories on Insider’s business page.

US stocks clung near record highs Wednesday as the first-quarter earnings season began its shift into high gear with blowout earnings results from big banks including Goldman Sachs.

The S&P 500 sought to build on its record close Tuesday that was led by tech stocks. Shares in that sector were also higher on Wednesday, giving a boost to the Nasdaq Composite.

The new quarterly earnings season started out with JP Morgan Chase JP Morgan Chase and Wells Fargo each turning in profit that surpassed Wall Street’s targets. Goldman Sachs beat revenue and profit expectations, aided by strong trading and investment banking revenue.

Here’s where US indexes stood at 9:30 a.m. on Wednesday:

A light economic calendar will “leave plenty of time for investors to watch the debut of Coinbase to the public markets. The listing couldn’t come at a better time for the company as crypto-currencies have been on absolute fire with both bitcoin and ether trading at record highs and riding what looks to be their seventh straight day of gains,” said Paul Hickey, co-founder of equity research firm Bespoke in a note.

Around the markets, Credit Suisse reportedly put $2 billion of Archegos-linked stocks on the market after the hedge fund’s meltdown. Part of the stock offering included Discovery Communications whose shares were lower Wednesday.

The First North American bitcoin ETF surges beyond $1 billion under management.

Gold fell 0.5% to $1,737.50 per ounce. Long-dated US treasury yields rose, with the 10-year yield at 1.634%.

Oil prices rose. West Texas Intermediate crude gained 2.2% to $61.50 per barrel. Brent crude, oil’s international benchmark, moved up 2.1% to $65.05 per barrel.

Bitcoin surged to $64,115.

Read the original article on Business Insider

Bank stocks could jump 45% on rising bond yields and attractive relative value, Morgan Stanley says

FILE PHOTO: A sign is displayed on the Morgan Stanley building in New York U.S., July 16, 2018. REUTERS/Lucas Jackson/File Photo
FILE PHOTO: A sign is displayed on the Morgan Stanley building in New York

  • Bank stocks could jump as much as 45% on a range of macroeconomic factors, according to Morgan Stanley.
  • “Banks have been a major beneficiary of the value rotation currently underway, with the S&P 500 Banks industry group up 19.9% YTD,” the note said.
  • Historically, bank stocks have benefitted from rising yields and a steepening curve, the note added.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell

Bank stocks could jump as much as 45% on various macroeconomic factors, from a steepening yield curve to attractive relative valuation that supports the sector’s outperformance, according to Morgan Stanley.

In a note published on Wednesday, the bank listed five factors that could drive the cohort higher, especially on the expectation of a rotation to value stocks rotation continuing in the near term.

“Banks have been a major beneficiary of the value rotation currently underway, with the S&P 500 Banks industry group up 19.9% [year-to-date], outperforming the broad S&P 500 index by 15.4%,” the note, led by quantitative strategist Boris Lerner, said.

Higher rates, strong economic growth, and fiscal stimulus all contribute to the growth of support value stocks, the note said. The analysts are seeing a a 20%-45% relative upside in the base case scenario.

(1) Rising yields

Banks have historically benefitted from rising yields and a steepening curve, the note said. As yields are expected to continue going up, which will result in a steeper yield curve, bank stocks are expected to keep performing well.

(2) Attractive relative valuation

Banks trade at a significant discount to the market, the note said, and because valuations are near median levels, market valuation at this point looks relatively high. Banks are cheap relative to the market, the note said. The analysts added that the current macroeconomic environment is supportive of value stocks, which have been outperforming growth stocks since the fourth quarter of 2020.

(3) Bank earnings are set to increase

Five key factors are driving EPS growth for banks, Morgan Stanley said. They are: (1) a steepening yield curve due to rising interest rates, (2) high GDP growth, which will boost loan growth, (3) lower credit losses, (4) accelerating job growth, and (5) accelerating buybacks as earnings grow.

(4) Light positioning

Exposure to financials among equity hedge funds is at a 10-year low, Morgan Stanley said, despite the recent rally in financials stocks.

“Active long-only managers are also underweight the sector relative to passive funds,” the note said.

(5) Momentum

The recent rally in financial stocks is expected to increase the net exposure of financials within the S&P 500 from -2% to +15% in the next 3 months, the note said. “Currently, 12-month S&P 500 momentum strategies are net short financials,” the note added. “Shorter-term momentum strategies, based on 9-month or 6-month returns often lead the 12-month momentum, and these portfolios currently have financials at 15% to 23% (highest exposure relative to other sectors).”

Read the original article on Business Insider

Treasury yields spike to highest in 14 months, pulling tech stocks down while boosting banks

GettyImages 1229890667
Fed Chairman Jerome Powell.

  • The 10-year Treasury yield pushed past 1.7% on Thursday, marking a fresh 14-month high for the benchmark note.
  • The 30-year yield also made a notable move by rising to 2.5% for the first time in more than a year.
  • Tech stocks were losing ground but bank shares advanced on the back of richer yields.
  • See more stories on Insider’s business page.

Borrowing costs quickly picked up pace Thursday as the benchmark 10-year Treasury note yield surged to a fresh 14- month high, with the move pressuring tech stocks but bolstering bank shares.

The 10-year yield climbed to an intraday high of 1.754%, a leap of nine basis points since ending at 1.64% on Wednesday. Meanwhile, the 30-year yield on Thursday rose to 2.5% for the first time since August 2019. That yield on Wednesday settled at 2.437%.

Investors keep a close watch on long-dated yields as they are tied to a range of lending programs such as mortgages and auto loans. Yields have been rising, while bonds sell off, as investors continue to price in expectations of higher inflation as the US economy recovers from the COVID-19 crisis.

But the increase in borrowing costs has stoked selling in growth stocks, including large-cap tech stocks that have run up over the past year. Thursday’s moves included Apple falling by 2.3%, Google’s parent company Alphabet down by 1.1%, and Microsoft losing 1.7%. The Nasdaq Composite, home to numerous tech stocks, lost 1.4%, and the S&P 500‘s information technology sector slumped 1.5%.

The 10-year yield on Wednesday reached its highest since January 2020 as investors positioned themselves before the Federal Reserve released its policy decision and economic projections. The central bank’s upgraded economic outlook included its view that gross domestic product will expand by 6.5% this year, up from the prior estimate of 4.2%. The 10-year yield pulled back from the 1.6% area during Wednesday’s session before roaring higher again on Thursday.

“Right now the market is pricing in a rate hike in the latter half of 2022, which we think is very early and, in fact, it’s nearly mathematically impossible for the Fed to hike in 2022 if they truly intend to look past transitory inflation,” Calvin Norris, US rates strategist at Aegon Asset Management, told Insider on Thursday. “What the market is implying is the Fed is going to cave on this persistency-of-inflation idea.”

Fed Chairman Jerome Powell on Wednesday reiterated the central bank’s stance of allowing inflation to rise past 2% to support growth in the labor market and the economy before it starts raising interest rates.

While tech stocks sold off, bank stocks charged up, with Bank of America gaining 4.1%. Banks aim to lend money on long-term rates and the increase in long-dated yields improves their prospects for growth in interest income.
Wells Fargo climbed 3.8% and JPMorgan Chase popped up 3.5%.

Also, the Invesco KBW Bank ETF tacked on 3% and the SPDR S&P Regional Banking ETF gained 3.2%.

“While it’s difficult to say when this might occur but we’re kind of setting the stage for some type of counter-trend rally here in Treasuries,” said Norris. “Treasuries are oversold, sentiment is extremely bearish, Treasuries are very cheap to foreign buyers,” he said.

“I think the market is trying to challenge the Fed. But if you do believe the Fed and the projections for growth and inflation, valuations look very attractive at these levels. Not to say that they can’t get cheaper and be more attractive but we’re at those levels that I think it’s difficult to add to short positions in here,” Norris added.

Read the original article on Business Insider

Value stocks will continue to rally into 2021-but overall S&P 500 returns will be tepid, says BofA

NYSE Trader smile happy
Traders work during the opening bell at the New York Stock Exchange (NYSE) on March 13, 2020 at Wall Street in New York City.

  • A recent rotation into value stocks was just the beginning of a rally that will continue into 2021, said a team of Bank of America analysts led by Savita Subramanian. 
  • But a prospective value stock rally is not necessarily bullish for the broader S&P 500, said the analysts, as the benchmark index is already at extreme levels of valuation and value stocks won’t be able to lift the entire index higher. 
  • “Our value call underpins our tepid outlook for the S&P 500,” said BofA. “But the S&P 500 is very different from the US economy. Here we believe the recovery is intact and recommend value exposure via financials and energy and small over large.”
  • Visit the Business Insider homepage for more stories.

The recent rotation into value stocks was just the beginning of a rally that will continue into 2021, said a team of Bank of America analysts led by Savita Subramanian.

In a Wednesday note to clients, the analysts highlighted that the Russell 1000 Value index has outperformed growth in the last three months, but the bargain-stock rally isn’t over.

“Despite the recent rotation, extreme valuations and entrenched positioning suggest we are in the early innings of a Value cycle. The relative discount for Value stocks remains nearly two standard deviations below average…” said BofA.

The financials sector is BofA’s top pick for value stocks. They also see opportunities in value-oriented cyclical industries like autos and multiline retail. The tech sector fell to the bottom of BofA’s list. 

But any rally in value stocks is not necessarily bullish for the broader S&P 500, said the analysts. In fact,Savita Subramanian sees the S&P 500 finishing 2021 at 3,800-only a 3% gain from current levels.

Read more:Morgan Stanley is warning that the stock market’s economic recovery trade may soon be over. Here are 4 strategies they recommend for finding the returns that still exist.

The analysts explained that the broader market is already richly valued and may not be able to climb much higher.  A value stock rally won’t be able to lift the entire market.

“Our value call underpins our tepid outlook for the S&P 500,” said BofA.” But the S&P 500 is very different from the US economy. Here we believe the recovery is intact and recommend value exposure via financials and energy and small over large.”

The bank remains cautious on stocks in the near-term, as valuations are rich and levels of optimism are at highs not seen since the Great Financial Crisis. The S&P 500 had the best November since 1928, soaring 11%, the analysts said.

“A lot of optimism is baked into stocks, along with rich valuations…and we remain cautious in the near-term. The medium-to-long-term bull case for stocks over bonds remains, although equity returns are likely to be sub-average (~5%),” added BofA.

Read the original article on Business Insider