U.S. Bank Earnings Are Coming: Was Buffett's Sell-Off a Smart Move?

Insights - This week, bank stocks will kick off the Q3 2024 U.S. earnings season. JPMorgan Chase and Wells Fargo will report on October 11, followed by Bank of America, Goldman Sachs, Citigroup on October 15, and Morgan Stanley on October 16.

Mixed Bank Earnings: Focus on Net Interest Income and Investment Banking

Analysts expect declining net interest income and rising loan loss provisions to hit overall bank profits. FactSet projects a 0.4% year-over-year decline for the financial sector in Q3, with banking profits down 12%, the largest drag.

Investment banking, however, is rebounding due to Fed rate cuts, with bond and equity issuance rising. JPMorgan is expected to be most affected by declining interest income, while Goldman Sachs and Morgan Stanley, more reliant on investment banking, are forecasted to see profit growth.

Source: FactSet

How Will Bank Stocks Perform During a Rate-Cut Cycle?

With the Fed starting a rate-cut cycle, attention on bank stocks is growing. Historically, rate cuts without a recession have been positive for bank stocks, as seen in 1995, 1998, and 2019. In a soft landing scenario, bank stocks typically outperform the S&P 500 by nearly 10% in the quarter following the first rate cut. However, if a recession follows, the outlook for bank stocks becomes less optimistic.

Is Buffett's Bank of America Sell-Off a Sign of U.S. Economic Pessimism?

From October 3 to 7, Warren Buffett sold $383 million worth of Bank of America shares, reducing his stake to 10.1%. Since July, he has sold around $10 billion.

Opinions vary on his motives. Some cite overvaluation in U.S. stocks, while others point to recession fears. There’s also speculation that increased regulatory scrutiny, particularly around fentanyl money laundering, could impact banks like Bank of America.

However, these continuous sell-offs suggest that Buffett is growing more cautious.