The Dow Jones Industrial Average rose about 3.8% in the first six months of the year, lagging way behind the Nasdaq, up 18.1%, and the S&P 500, which jumped 14.5% — as investors plowed into artificial intelligence-related stocks.
Brendan Mcdermid | Reuters
This report is from today’s CNBC Daily Open, our international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
Boeing ‘guilty plea’ U.S. prosecutors plan to seek a guilty plea from Boeing over a charge related to two fatal 737 Max crashes in 2018 and 2019, attorneys for the victims’ family members said. The Justice Department is reviewing whether Boeing violated a 2021 settlement that shielded the company from federal charges. Boeing agreed then to pay a $2.5 billion penalty for a conspiracy charge tied to the crashes. The DOJ revisited the agreement after a door panel blew out of a new 737 Max 9 in January, sparking a new safety crisis.
Under fire Nike CEO John Donahoe faces growing discontent as the company’s stock plummeted 20% on Friday, its worst day since 1980, after forecasting a significant decline in sales. As Wall Street digested the dismal outlook from the world’s largest sportswear company, at least six investment banks downgraded Nike’s stock. Analysts at Morgan Stanley and Stifel took it a step further, specifically calling the company’s management into question.
Bitcoin windfall Mt. Gox, a bankrupt Japanese bitcoin exchange, is set to repay creditors nearly $9 billion worth of Bitcoin following a 2011 hack. The court-appointed trustee overseeing the exchange’s bankruptcy proceedings said distributions to the firm’s roughly 20,000 creditors would begin this month. The payout is likely to be a windfall for those who waited a decade, with Bitcoin’s value surging from around $600 in 2014 to over $60,000 today. One claimant, Gregory Greene, could potentially receive $2.5 million for his $25,000 investment.
Inflation cooling A key inflation measure, watched closely by the Federal Reserve, slowed to its lowest annual rate in over three years in May, with the core personal consumption expenditures price index rising 2.6% from a year ago. “This is just additional news that monetary policy is working, inflation is gradually cooling,” San Francisco Fed President Mary Daly told CNBC’s Andrew Ross Sorkin during a “Squawk Box” interview. “That’s a relief for businesses and households who have been struggling with persistently high inflation. It’s good news for how policy is working.”
[PRO] Rally will broaden The tech sector has driven market performance in 2024, with the S&P 500 tech group up 28% and Nvidia soaring 149%, while small-caps have lagged. Oppenheimer’s chief market strategist John Stoltzfus believes the rally will broaden. CNBC’s Lisa Kailai Han looks at the reasons behind his call.
It's a busy political environment for markets to navigate. Wall Street has shown remarkable resilience thanks to the AI-powered rally in the first half of the year, which has seen the Nasdaq soar 18% so far. Nvidia is up almost 150%. There could be more to come; Bank of America believes Nvidia and Apple could still deliver "superior returns."
John Donahoe was brought in from eBay to transform the athletic apparel giant's digital channels. The company ditched its retail partners, became too dependent on its aging sneaker ranges and lost ground to new contenders Hoka and On. It'll certainly make an interesting case study for MBA programs for all the wrong reasons. As Wall Street questioned Donahoe's position, he still had the approval of its founder.
Friday also saw the Fed's favored inflation measure come in line with expectations, raising the prospect of interest rate cuts later this year.
"I really think the Fed should tee up a cut at the July 31 meeting, confirm it at Jackson Hole in August and do it in September," Wharton finance professor Jeremy Siegel told CNBC's "Squawk on the Street." He added that one or maybe one-and-a-half rate cuts have already been priced in.
"I actually think there will be more because there might be a little bit more softness in the economy and better inflation numbers, both of those feeding better rates," he continued. Siegel also said it is "hard to say" where the bull market's trajectory currently stands.
In a four-day trading week — markets are closed for the July 4 Independence Day holiday — the big economic number to watch is the June jobless data on Friday. CNBC's Sarah Min has more on what to expect.
— CNBC's Lisa Kailai Han, Yun Li, Jeff Cox, Leslie Josephs, Gabrielle Fonrouge, Hakyung Kim, Brian Evans, Spencer Kimball, Ryan Browne and MacKenzie Sigalos contributed to this report.
A trader works on the floor of the New York Stock Exchange (NYSE) during morning trading on March 4, 2024 in New York City.
Angela Weiss | Afp | Getty Images
This report is from today’s CNBC Daily Open, our international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
Micron slides Shares of Micron fell almost 8% in extended trading on Wednesday as its revenue forecast failed to top analysts’ expectations. The computer memory and storage maker expects revenue of $7.6 billion in the current quarter, in line with estimates. Micron’s shares have doubled in the past year as its most advanced memory is needed for AI graphics processing units. CEO Sanjay Mehrotra said the company’s AI-oriented products were likely to increase in price and its data center business grew 50% on a quarter-to-quarter basis.
$2,000,000,000,000 Amazon‘s market capitalization surpassed $2 trillion for the first time on Wednesday, joining the ranks of tech giants like Apple and Microsoft. The surge in megacap tech stocks has been driven by investor excitement around generative AI. Amazon’s stock has risen 26% this year, outpacing the Nasdaq’s 18% increase. The stock rose 3.9% on Wednesday. Separately, CNBC’s Annie Palmer reports Amazon plans to launch a discount store in bid to fend off Temu and Shein.
Southwest cuts guidance Southwest Airlinescut its second-quarter revenue forecast due to difficulties adapting its revenue management to recent booking trends. Despite the revised outlook, the airline still expects record quarterly operating revenue. Activist investor Elliott Management reiterated calls for leadership changes, “Southwest is led by a team that has proven unable to adapt to the modern airline industry.” Higher costs and increased capacity have impacted fares and profits across the industry, while competitors like Delta and United have benefited from the return of international travel. Southwest shares fell 4% before recovering to end the session just 0.2% lower.
Asian stocks fall, yen weakens Japan’s export-heavy Nikkei 225 and the broad-based Topix fell as the yenweakened to a 38-year low against the U.S. dollar, raising the prospect of intervention. Finance Minister Shunichi Suzuki warned the country was “deeply concerned about FX impact on economy,” per Reuters. Elsewhere, Hong Kong’s Hang Seng index led the rest of the Asia-Pacific region lower, tumbling 2%, and mainland China’s CSI 300 was down 0.6%. Australia’s S&P/ASX 200 dropped 0.58% and South Korea’s Kospi dipped 0.37%
[PRO] Investing in India India’s unexpected election results haven’t dampened Causeway Capital Management’s bullish outlook. Although portfolio manager Arjun Jayaraman predicts modest short-term returns for the BSE Sensex index, he suggests ETFs that could benefit from higher returns.
There was a surge of activity in the auto industry that may have been overshadowed by Volkswagen's $5 billion investment in the loss-making EV maker Rivian. While VW makes solid cars, its electric vehicles are plagued with glitchy software. As CNBC's Sophie Kiderlin notes this investment will take years to yield returns. Analysts, however, are wary of the current "EV winter" marked by tepid demand and increased competition. Despite these challenges, Rivian's stock surged 23%, reflecting investor optimism.
Elsewhere in the industry, Waymo, Alphabet's self-driving car unit, expanded its robotaxi service to all users in San Francisco. Meanwhile, General Motors's Cruise autonomous vehicle division appointed former Amazon and Microsoft executive Marc Whitten as its new CEO. This leadership change follows a series of collisions that led to investigations and the suspension of Cruise's license in California, heightening public skepticism about driverless technology.
While Waymo is steadily rolling out its services and Cruise is restarting its operations, Tesla has yet to introduce its long-promised robotaxi. Elon Musk's projections for a 2020 launch and fully autonomous driving by 2018 have yet to materialize. Nevertheless, Musk envisions Tesla as a potential $7 trillion robotaxi enterprise. The unveiling of Tesla's robotaxi on Aug. 8 will be closely watched to gauge its competitive edge.
Rivian shareholder Amazon joined the exclusive $2 trillion market cap club, alongside Alphabet, Nvidia, Apple and Microsoft. This milestone comes as Amazon aggressively cuts costs.
While enthusiasm for AI remains high, Wall Street experienced a more measured session as investors sought to lock in profits from the Nvidia-driven surge. Despite the current optimism, strategists caution that the S&P 500 might face a correction over the summer. CNBC's Sarah Min explores the factors behind Citi's projections and a series of recent upgrades.
— CNBC's Hakyung Kim, Brian Evans, Alex Sherman, Samantha Subin, Annie Palmer, Ece Yildirim, Michael Wayland, Sophie Kiderlin, Spencer Kimball, Leslie Josephs, Sarah Min, Sheila Chiang and Lim Hui Jie contributed to this report.
Regional banking stocks are on pace for their worst year back to 2006, with the long tail of the SVB collapse. But bank stocks had been in rally mode since May, when First Republic was seized by the government and sold to JPMorgan, until bond rating agencies began issuing August warnings and downgrades.
Bloomberg | Bloomberg | Getty Images
Just how bad off are America’s banks, really?
Bond rating agencies trash-talked banks all through August, helping drive a near-6% drop in the S&P 500 during the month. But Wall Street equity analysts who cover banks argue that their counterparts on the bond side of the research profession, at Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, got it wrong. They point to a period of rising bank stock prices before the bond ratings calls and better-than-expected earnings reports as evidence that things are better than the agencies think.
While the regional banking sector as tracked by the SPDR S&P Regional Banking Index is down nearly 25% year to date, according to Morningstar — and on pace for the worst year on record back to its inception in 2006, with the long tail of the SVB collapse hard to claw back gains from — bank stocks had been in rally mode from May to July. Regional bank stocks, in particular, gained as much as 35% before the bond warnings and downgrades began. Meanwhile, second-quarter bank earnings beat forecasts by 5%, according to Morgan Stanley.
The higher interest rates bond analysts cited hurt profits some, but most banks’ net interest income and margins were higher than a year before. Delinquencies on commercial real estate loans rose, but stayed well below 1% of loans at most institutions, with some of the banks singled out by bond rating agencies reporting no delinquencies at all. The ratings actions pushed the regional bank stock index 10% lower for the month-long period ending Sept. 8, according to Morningstar (the Moody’s bank warning was issued August 7).
At stake is not only what bank stocks may do next, but whether banks will be able to fill their role in providing credit to the rest of the economy, said Jill Cetina, associate managing director for U.S. banks at Moody’s. Their medium-term fate will have a lot to do with outside forces, from whether the Federal Reserve cuts interest rates next year to how fast the return-to-work push from employers in recent months gains momentum. Looming over all of this is the question of whether there will be a recession by early 2024 that worsens credit problems and cuts banks’ asset values, as Moody’s Investors Service expects.
“It’s reasonable to ask, is there a credit contraction in the banking sector?” Cetina said. She pointed to Federal Reserve surveys of bank lending officers that look like pre-recession measures in 2007 and 2000, with many banks raising credit prices and tightening lending standards. “Banks play a key role in shaping macroeconomic outcomes,” she said.
By any reckoning, the argument about banks is about two things: Interest rates and real estate, specifically office buildings. (Banks also call warehouses and apartment complexes commercial real estate, but their vacancy rates are not historically high). The arguments depend on two assumptions that markets believe less than they did earlier this year.
The bear case relies heavily on the prospect of a recession, which stock investors and economists think is much less likely than many believed six months ago. Goldman Sachs chief economist Jan Hatzius cut the firm’s estimated U.S. recession odds to 15% on Sept. 4, meaning the bank sees only a baseline risk of a downturn. At Moody’s, while the bond-rating arm expects a U.S. recession next year, the company’s economic consulting unit Moody’s Analytics doesn’t.
It also turns on an assumption of sustained high interest rates. While debate continues and the Fed’s own commentary continues to express a willingness to raise rates more, many investors now think the Fed will begin to trim the Fed funds rate by spring as inflation fades, according to CME Fedwatch. And while experts such as RXR Realty CEO Scott Rechler and billionaire real estate investor Jeff Greene believe office vacancies will stay high enough to force defaults by more developers, even as employers gain the upper hand against workers who want to continue to work from home, that didn’t show up in second–quarter bank earnings.
“I don’t necessarily think what they said is not true– it’s just less true than in May,” said CFRA Research bank stock analyst Alexander Yokum. “Expectations have improved over the last few months.”
March’s bank failures were about interest rates. The rise in rates since the Fed’s first post-Covid boost to the Fed funds rate in March 2022 had left banks with trillions of dollars of bonds written at lower rates before last year, whose value fell as rates rose. That opened precarious holes in the balance sheets of some banks, and fatal ones for banks that failed. Coupled with commercial real estate, higher funding costs create “layers” of risk going forward, Cetina said. “They’re both a problem, and they are happening at the same time,” she said.
The Fed stepped in with a short-term solution for banks’ funding issues, extending more than $100 billion in financing under a program called the Bank Term Funding Program, designed to help banks close the gap between the book value of their securities, mostly U.S. Treasuries, and their market value in a new, higher interest-rate market. That lets banks act as if their capital is not impaired, when it is, said veteran analyst and Fed critic Dick Bove of Odeon Capital.
“If the capital is not there, the bank can’t put more money out there” in loans, Bove said. “People say they understand that, but they don’t.”
Interest rate effects on bank profits
The jump in rates threatens the net interest income that is the source of bank profits and their long-term lending capacity, the bond rating agencies said. Indeed, interest income fell at most banks in the second quarter – compared to the first quarter – and Yokum says it will fall more in the third quarter. So did net interest margin – the difference between the rates banks pay for funds, usually deposits, and what they collect on loans and other assets.
But the drops were small enough that banks made up the lost income elsewhere. The average regional bank stock rose 8% after earnings, Morgan Stanley said, with banks beating profit forecasts by an average of 5%. Most banks reported before the bond agencies acted.
Bulls point out that while interest rates began to bite at bank profits in the second quarter, the impact so far has been minor for most, and several banks said that higher interest rates have boosted profits over the past year. At most banks, both net interest income and net interest margins did better in the second quarter than in the second quarter of 2022, making rising rates helpful to bank profits overall. Morgan Stanley analysts Manan Gosalia and Betsy Graseck said most banks, even regional banks thought to be most vulnerable to depositors fleeing as rates rise, also added deposits in the quarter. That stems fears they would boost rates sharply to keep customers.
Not all banks felt much pressure on deposit rates: Wells Fargo said its average was 1.13% in the second quarter; at Bank of America it was just 1.24%.
Credit quality is on the decline
Credit quality is getting a little worse, but still better than pre-pandemic levels at most institutions, Yokum said. Even the office sector still is showing few signs of serious problems. Moody’s calls banks’ current credit quality “solid but unsustainable.”
Valley has $50 billion in loans on its balance sheet, and $27.8 billion of them are in commercial real estate, according to the bank, a much higher proportion than the 7% at Bank of America. But only 10% of Valley’s commercial real estate loans, less than 6% of its total loans, are to office buildings.
Valley has had stumbles in office lending, to be sure. It disclosed that its total non-performing assets were $256 million at the end of June. But that remains only about half of 1% of its total loan book. Chargeoffs of loans the bank thinks won’t be fully repaid fell in the quarter, and the company’s $460 million in loan loss reserves is nearly double the amount of all its troubled loans.
Similarly, Zions’ $2 billion office portfolio, part of a commercial real estate exposure that is more than a quarter of the bank’s assets, doesn’t have a single delinquent loan, according to the bank’s second-quarter report. Neither did Commerce.
“Zions’ chargeoffs were .09 of 1% of total assets,” said Yokum, who doesn’t follow Commerce or Valley. “Not alarming.”
Many banks argue that bears overstate real-estate lending problems by overlooking how few of their real estate loans are to office buildings. With hotel and warehouse occupancy high, they’re selling the idea that only their office portfolio is at serious risk, and that the office loans are too small to threaten banks’ health. At KeyCorp, whose shares have dropped 36% this year and which S&P downgraded, office loans are 0.8% of the bank’s total.
Bank delinquencies rose in the last quarter, but remain lower than a year ago.
“We have limited office exposure with … almost no delinquencies,” Fifth Third Bancorp chief financial officer James Leonard said on the bank’s earnings call. “We continue to watch office closely and believe the overall impact on Fifth Third will be limited.”
Two big questions about banks finding a bottom
There are two big unanswered questions about banks and real estate. Eight months into a year where nearly a quarter of office building mortgages are expected to mature and need refinancing at today’s higher rates, chargeoffs — while getting more common — are still less than 1% of loans at nearly every major bank. Is a surge coming, or are banks delaying a reckoning with short-term financing, hoping for rates to fall or occupancy to rise?
And, when will more workers go back to the office, relieving pressure on companies to stop paying for space they don’t really use?
The share of U.S. workers working from home at least part of the week has stabilized at around 20-25%, below its peak of 47% in 2021 but well above the pre-pandemic 2.6%, Goldman’s Hatzius wrote in an Aug. 28 report. With CEOs as prominent as Amazon’s Andy Jassy becoming more forceful about return to office, Goldman says online job postings are down to only 15% of new positions allowing work from home. Even Zoom Communications, maker of video-conferencing software, is making staffers return to the office two days a week. Hatzius estimates remaining part-time WFH will add 3 percentage points to office building vacancy rates by 2030. But that impact will be lessened by a near-halting in new construction, he wrote.
Findings like these have some market players speculating that a bottom may be near.
Manhattan real estate attorney Trevor Adler says he’s seeing an uptick, with public sector tenants like Empire State Development signing long-term leases. ESD took 117,000 square feet in Midtown in July, he said.
“To have that kind of deal in July is not typical,” said Adler, a partner at Stroock & Stroock & Lavan. “That work is keeping me busy, educational, hospital and charity.”
Others argue that the slow rate of foreclosures is normal early in what they believe is a long-term crisis.
“Crises happen slowly, then all at once,” said Ben Miller, CEO of Washington-based Fundrise, an online platform for real estate investment, pointing out that several years elapsed between early warnings and the depth of the late-2000s home mortgage crisis.
Banks have been encouraged by the Fed and other bank regulators to give previously-solvent borrowers extensions or other workouts, Miller said. Regulators argue that this guidance, released in June, simply restated previous policy.
The primary way the Fed can defuse upcoming foreclosures is to lower rates, so developers can refinance office buildings and stay profitable, Miller said.
“If we end up higher for longer, the banks have a huge problem,” Miller said. “If high rates are transitory, it gets the bank to a normalized rate environment and there’s no problem.”
Officials at the Fed declined comment.
The takeaway may be that banks’ problems are big enough to contain earnings for a few quarters, while not threatening their solvency, Yokum said. At Standard & Poor’s, analysts emphasized that 90% of U.S. banks have stable outlooks, even as it downgraded five banks. “Stability in the U.S. banking sector has improved significantly in recent months,” analysts led by Brendan Browne wrote.
“I do expect net interest margins to fall in the third quarter, and for credit quality to get worse, but I expect them both to be manageable,” Yokum said. “And both are well built into the stock prices.”
