Wells Fargo stock hit new multi-year highs on Monday after Wall Street analysts praised the bank’s third-quarter earnings report. The news Shares of Club name Wells Fargo jumped more than 3% on Monday — a close above $63 would be the highest finish since January 2018. That’s on top of Friday’s more than 5.6% post-earnings rally, which extended its recent run to six straight sessions. Investors are mulling a slew of positive analysts’ calls after Wells Fargo’s better-than-expected quarterly earnings . While missing on revenue, the bank impressed with a surge in fee-based income streams that offset weakness in other parts of the business. WFC 5Y mountain Wells Fargo 5 years In response, Barclays raised Wells Fargo’s price target to $75 apiece from $66 on Sunday, implying roughly 23% upside from Friday’s prior close. The analysts cited both “increased confidence of a soft landing” and “improvements in operational risk and compliance, which should ultimately lead to [the] removal of its asset cap,” which was imposed by the Federal Reserve in 2018 following misdeeds before Charlie Scharf took over as CEO. Barclays maintained its buy-equivalent rating on the financial name. Piper Sandler hiked its Wells Fargo price target slightly to $62 from $60. “We are keeping our neutral rating, but note that the story becomes more interesting as net interest income begins to find its bottom, the fee base gains momentum, and regulatory issues seem to move forward,” analysts wrote in a Friday note. Big picture Big bank earnings are off to a great start. Not only did Wells Fargo post solid results, but so did JPMorgan Chase . On Friday, the Jamie Dimon-led bank topped analysts’ expectations on earnings and revenue on continued strength in non-interest income streams. Wall Street behemoths including Bank of America, Citigroup and Goldman Sachs are set to post results before Tuesday’s bell. The Club’s other financial name, Morgan Stanley, releases earnings on Wednesday morning. Getting a look at Goldman Sachs’ quarter and then Morgan Stanley should be interesting. Although Jim has previously said the Club would rather be in Goldman than Morgan Stanley, we’re taking a wait-and-see approach to the stock. That’s because Morgan Stanley can turn things around if Wall Street dealmaking picks up and eventually boosts the firm’s investment banking business. Bottom line We’re not surprised that Wells Fargo’s getting the recognition it deserves. After the earnings release. the Club on Friday raised our price target on the bank to $66 per share from $62. We also reiterated our buy-equivalent 1 rating on the stock. “What an amazing quarter,” Jim Cramer said Monday. “Friday was Charlie Scharf’s day.” Similar to the Wall Street analysts, we’re upbeat on the progress Wells Fargo is making toward convincing the Fed to lift the $1.95 trillion asset cap. The removal of this growth lid is crucial to Wells Fargo’s turnaround story and a big reason why the Club invested in the stock in the first place. In fact, in Jim’s Sunday column , he argued that Wells Fargo’s earnings report may be the best of the batch so far. He said he was “astounded that Wells Fargo had been able to start changing its business model to the point where it was more of an investment bank” than previously thought. That’s why we do have one qualm with Piper Sandler’s commentary, in particular. We don’t agree with the research firm’s choice to leave the stock at a hold-equivalent rating. (Jim Cramer’s Charitable Trust is long WFC, MS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Wells Fargo bank signage is seen on Broadway on April 12, 2024 in New York City.
Michael M. Santiago | Getty Images
Wells Fargo stock hit new multi-year highs on Monday after Wall Street analysts praised the bank’s third-quarter earnings report.
Jim Cramer has been considering a potential investment in BlackRock, the world’s largest asset manager, and we’re now adding it to our Bullpen stocks-to-watch list. The news BlackRock shares surged to a record high Friday after the firm posted third-quarter earnings that crushed analysts’ expectations, yet again. Management also announced that assets under management reached another record high, an incredible $11.5 trillion, on surging inflows as the stock market rallied. “We’ve added $2 trillion organically over the last five years. $2 trillion is the equivalent of being in the ranks of the sixth largest asset managers,” CEO Larry Fink told CNBC on Friday after the release. Fink also praised BlackRock’s recent $12.5 billion acquisition of Global Infrastructure Partners, which added more than $100 billion in assets. Big picture The financial industry kicked off quarterly earnings Friday. In addition to BlackRock, Club name Wells Fargo was among the companies that delivered strong results. Morgan Stanley , also in the portfolio, reports next Wednesday. It’s been a murky operating environment for the Wall Street behemoths, which were forced to navigate higher-for-longer interest rates until the Federal Reserve finally cut rates last month. The Fed’s next move has been a point of debate. Right after last month’s jumbo 50-basis-point cut, the market had expected another 75 basis points worth of cuts before year-end. Now that odds favor just 50. Bottom line BlackRock’s stellar quarterly results highlight another reason for the Club to consider an initiation of the stock. That’s why we put the stock in the Bullpen. Management’s track record draws us in further as Fink expands the firm’s footprint in private markets, and delivers quarter after quarter of steller inflows. BlackRock shares have been on a tear recently – up more than 12% in the past month versus the S & P 500’s roughly 4% gain. Jim Cramer said Friday he knows the stock has run a lot, “but that doesn’t mean it can’t run more.” Why have we waited to pull the trigger on the stock? Jim said Thursday he wished he had but he’s been dealing with Wells Fargo and Morgan Stanley, and we don’t make these moves in haste. (Jim Cramer’s Charitable Trust is long MS, WFC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
BlackRock CEO Larry Fink speaks during the New York Times DealBook Summit Nov. 30, 2022 in New York City.
Michael M. Santiago | Getty Images News | Getty Images
Jim Cramer has been considering a potential investment in BlackRock, the world’s largest asset manager, and we’re now adding it to our Bullpen stocks-to-watch list.
Newfound optimism on Morgan Stanley helped its stock close Friday’s session at its highest level of the year. Jim Cramer is still unsure what the Club’s next move should be. Morgan Stanley’s persistent underperformance has made the stock one of our thornier positions — so much so that Jim has openly considered dumping it for investment banking rival Goldman Sachs . Dealmaking activity has picked up, but it’s not been enough to fully unlock Morgan Stanley shares. That is in large part because the bank’s wealth management division has failed to impress. Analysts at HSBC see better days ahead for Morgan Stanley and in a note to clients late Thursday upgraded the stock to a buy rating from hold, arguing its “long period of underperformance could be ending.” Among the reasons for the call: A healthy market backdrop should support the financial performance of both its investment banking and wealth management operations, analysts said. They added that negative sentiment around the stock more generally also seems to have bottomed. Shares of Morgan Stanley rose more than 3% Friday, to $107.88 each, helped by both HSBC’s upgrade and better-than-expected jobs data , which lifted the entire banking sector higher, including fellow portfolio name Wells Fargo . Morgan Stanley ended Friday within a dollar of its all-time closing high of $108.73 reached back in February 2022. Still, the stock is up only 15.7% year to date and 36.4% over the past 12 months, lagging behind the KBW Bank Index , which has climbed 19.4% and 52.6%, respectively, over those timeframes. For its part, Goldman Sachs has jumped 28.4% so far in 2024 and 60.5% in the past year. Friday’s positive developments are welcome news – but not enough to add clarity on our path forward for Morgan Stanley. We’re maintaining our hold-equivalent 2 rating on the stock. “Candidly, I think that [Morgan Stanley] is not priced for a good IPO market and [Goldman Sachs] is,” Jim said Friday. “The reason for that is because I think that people believe the wealth advisory business isn’t doing as well as it can be and the E-Trade buy seems to not be working out,” Jim said, referring to Morgan Stanley’s $13 billion acquisition of the brokerage firm in 2020. “We still do not have answers for that so I can’t say that we are going to upgrade.” However, there’s hope Morgan Stanley’s stock can climb higher if its sizable investment banking business continues its recovery. In order for that to happen, there must be a more meaningful resurgence in initial public offerings (IPO) and mergers and acquisitions (M & A) after more than two downbeat years for both dealmaking markets. Banks like Morgan Stanley and Goldman Sachs have long relied on fee-based revenues from deals. The more activity there is, the more fees available for them to collect. The nascent rebound has already showed up in Morgan Stanley’s results. In the second quarter, revenue for the firm’s investment banking segment surged 51% year over year. Meanwhile, advisory and equity underwriting fees both increased 30% and 56%, respectively, over the same period. The environment for deals is not back to normal just yet, though. During an industry conference in September, Morgan Stanley co-president Dan Simkowitz said that M & A and IPOs will likely remain below trend through year-end. To be sure, the executive also forecasted that this activity would accelerate in 2025 as the Federal Reserve’s interest rate-cutting efforts ripple through the economy. Morgan Stanley’s wealth management franchise — a major growth priority for the bank — is a lingering concern after a miss on revenues last quarter, which caused the stock to briefly sink. Meanwhile, Goldman Sachs beat analysts’ expectations for revenues in wealth. Morgan Stanley’s quarterly results on Oct. 17 will provide an important look at whether this challenged part of its business is showing any reason for optimism. For the time being, the Club is taking a wait-and-see approach with Morgan Stanley stock. If there is a surge in IPO and M & A activity that HSBC forecasted, Morgan Stanley is well-positioned to benefit. “If we get deals, [Morgan Stanley] will be a good place to be,” Jim said. (Jim Cramer’s Charitable Trust is long MS, WFC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Bing Guan | Bloomberg | Getty Images
Newfound optimism on Morgan Stanley helped its stock close Friday’s session at its highest level of the year. Jim Cramer is still unsure what the Club’s next move should be.
Great news for Club stocks Wells Fargo and Morgan Stanley : The rebound in investment banking isn’t over yet. The catalyst? Dealmaking is expected to continue to rise as the Federal Reserve delivers more interest rate cuts. This should, in turn, boost revenues for a key business within both Wall Street firms. We’ll find out to what extent when Wells Fargo reports earnings on Oct. 11 and Morgan Stanley delivers quarterly results on Oct. 16. Lower borrowing costs tend to spur mergers and acquisitions (M & A) and initial public offerings (IPO), which means more business for the banks. Recent numbers from consulting firm KPMG and financial data provider S & P Global Market Intelligence indicate a solid pickup in activity for M & A and IPOs already. So far in 2024, mergers and acquisitions transaction values and money raised from initial public offerings are largely outperforming all of last year’s lackluster activity. U.S. mergers and acquisitions rose 37% to $1.3 trillion in the first nine months of 2024 compared to the same period a year ago, according to KPMG, citing data through Sept. 15. Global M & A transaction values so far this year of roughly $2 trillion have already beat 2023’s total of $1.6 trillion, according to S & P Global data captured on Oct. 1. The IPO market has improved, too. According to KPMG, public offerings listed in the U.S. raised $28.3 billion during the first nine months of 2024. That’s up 50% year over year. All of this bodes well for the kind of advisory and underwriting fees that investment banks can charge to facilitate these deals. To be sure, M & A and IPO values are still down significantly from their Covid peaks in 2021 after the Fed delivered two emergency rate cuts in March 2020 that took the cost of borrowing to near zero. Rates remained that way until March 2022 when central bankers started their tightening cycle to fight inflation. The Fed hiked rates 11 times over 18 months before cutting rates by 50 basis points last month. Speaking at a National Association for Business Economics event in Nashville, Tennessee, Fed Chairman Jerome Powell said Monday that he expects an additional 50 basis points worth of rate cuts this year — 25 in November and 25 in December. The market is not quite ready to take Powell at his word. As of Tuesday, the CME FedWatch tool was putting roughly 66% odds on a 50 basis point cut in December. Rebecca Brokmeier, group head of KPMG’s investment banking platform, sees “an increase in new deals in the market in the fourth calendar quarter and expects this trend to continue as we move into 2025” while the Fed continues to lower rates. Brokmeier told CNBC Tuesday that a lot of this activity is expected to be driven by private equity, which is “more reliant on low interest rates for transactions than corporations and have record levels of dry powder to deploy as well as long-held assets that must be exited in order to return cash to their investors.” MS YTD mountain Morgan Stanley (MS) year-to-date performance For Morgan Stanley, a resurgence in its investment banking division is crucial to our investment thesis and why we stuck with it. Following nearly two downbeat years, we saw reason to be optimistic about Morgan Stanley’s IB business last quarter, which was out in July. IB segment revenue jumped 51%. Breaking IB down further, advisory and equity underwriting fees both surged 30% and 56%, respectively, from the prior year. Last month, however, Jim Cramer criticized the stock’s underperformance , adding that he was considering exiting Morgan Stanley and swapping in investment banking rival Goldman Sachs , where he used to work during his days on Wall Street. Part of that underperformance came after co-president Dan Simkowitz said that M & A and IPOs will remain below trend for the rest of 2024 at an industry conference. To be sure, he also predicted that this activity would accelerate in 2025 as the Fed lowers rates. “Morgan Stanley is in no man’s land, too low to sell and too high to buy. That means wait, which is exactly what we are doing,” Jim said during the Club’s Monthly Meeting on Sept. 12, two days after Simkowitz’s comments. “It might be time to say goodbye and pick up some of the much better run Goldman Sachs.” A week later, Morgan Stanley stock rose on the Fed rate cut, and the Club settled for trimming the position . Morgan Stanley has diversified its portfolio and moved more heavily into wealth management in recent years to reduce its exposure to the volatility of the IB business. So, it remains to be seen how investment banking performance fits into the whole profit picture. WFC YTD mountain Wells Fargo (WFC) year-to-date Morgan Stanley’s IB business is much larger than Wells Fargo’s. However, Wells Fargo, known for its roots as a traditional money center bank, has been working diligently to build out its dealmaking side of the shop. It’s kind of the opposite of Morgan Stanley. Wells Fargo, which has a strong wealth management franchise, is branching out to take a slice of the IB pie. Wells has made a series of senior-level hires in recent years to expand its corporate and investment banking (CIB) division. This helps the bank rely less on interest-based incomes from its consumer lending business, which have been long at the mercy of the Fed’s monetary policy decisions. We’ve seen positive signs already, as CIB revenue jumped 38% year over year in the July quarter. “We continued to see growth in our fee-based revenue offsetting an expected decline in net interest income,” Wells Fargo CEO Charlie Scharf said during the July 12 earnings call. “The investments we have been making allowed us to take advantage of the market activity in the quarter with strong performance in investment advisory, trading and investment banking fees.” In another positive development in Scharf’s bid to clean up the bank’s past missteps and get regulatory permission to expand, Bloomberg News reported last week that Wells Fargo submitted a third-party review of its risk and control overhauls to the Fed in an effort to get the central bank-mandated $1.95 trillion asset cap removed. The restriction was put in place by the Fed in 2018 after a series of scandals under previous leadership. (Jim Cramer’s Charitable Trust is long WFC, MS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Federal Reserve Chairman Jerome Powell speaks during a news conference following the September meeting of the Federal Open Market Committee at the William McChesney Martin Jr. Federal Reserve Board Building on September 18, 2024 in Washington, DC.
Big Wall Street banks and interest rates have a complicated relationship. As the Federal Reserve on Wednesday afternoon embarks on easing monetary policy, banks are hoping for a more normalized bond market yield curve, with a wider spread between the short end and the long end. Banks make interest income by paying for deposits at a lower rate and lending at a higher rate. They also make money on fee-based services in businesses that pick up when rates are lower. “These banks are pretty sophisticated,” Erica Groshen, former New York Fed vice president, told CNBC in an interview. “They have been managing their risk all along knowing that eventually, interest rates were going to come down.” Groshen, a senior economic advisor at Cornell University, added, “The Fed has been doing a pretty amazing job of getting very close to a soft landing” as a stable economy can lift all boats. On the interest side, banks pull levers and push buttons to make the best of any rate environment. But the clearest line of sight to the benefits of lower rates is in investment banking because cheaper borrowing costs tend to encourage more mergers and acquisitions and initial public offerings. Banks take fees from clients putting together deals and taking their companies public. For Morgan Stanley , a rebound in capital markets is crucial to the Club’s investment thesis. While diversifying in recent years to become less dependent on investment banking, it’s still a big part of the business. When the Fed started hiking rates in March 2022, M & A and IPO activity grounded to a halt. Would-be clients sought to conserve capital on concerns about a recession. Dealmaking, however, has picked up this year on the prospects of lower rates. The Club has stayed with Morgan Stanley on expectations that its investment banking outfit will flourish again. MS YTD mountain Morgan Stanley (MS) year-to-date performance There has been some progress so far. Morgan Stanley was tapped for high-profile deals like Reddit’s IPO in March. Investment banking, which falls under Morgan Stanley’s Institutional Securities, accounts for roughly 46% of overall revenue. The division handily beat on second-quarter revenue . Morgan Stanley’s IB revenue increased 53% year-over-year, while advisory fees and equity underwriting fees jumped more than 30% and 56%, respectively. Still, Jim Cramer recently said there have not been enough signs of a recovery at Morgan Stanley. The stock’s underperformance compared to peers and the market has disappointed him. Shares of Morgan Stanley are up 7% year to date, versus the KBW Bank Index ‘s nearly 17% gain and the S & P 500 ‘s 18% advance in 2024. Jim has said he’s considering swapping Morgan Stanley for his old shop Goldman Sachs . “Morgan Stanley is in no man’s land, too low to sell and too high to buy. That means wait, which is exactly what we are doing,” he said during last week’s September Monthly Meeting. “That said, I think we have battled enough.” At Wells Fargo , the Club’s other financial name, lower rates should help its burgeoning investment banking business. While known as a traditional money center bank, CEO Charlie Scharf has been diversifying the firm’s business mix. Wells Fargo shares year-to-date have performed better than Morgan Stanley, gaining 11%. However, the stock was still trailing KBW and the S & P 500 over the same stretch. WFC YTD mountain Wells Fargo (WFC) year-to-date performance The Corporate and Investment Banking division makes up 23% of overall revenue. However, management has made significant strides to expand CIB through a slew of senior hires. These investments are helping Wells Fargo to rely less on interest-based revenue streams, which are at the mercy of the Fed’s policy rather than management’s own strategy. “Wells is doing incredibly well and I think that CEO Charlie Scharf has a winning formula for when rates go down,” Jim said, referencing the firm’s CIB expansion. Investment banking at Wells Fargo houses its Commercial Real Estate portfolio — once one of the largest among big banks. The estimated $21 trillion CRE sector has experienced mounting troubles due to higher vacancy rates and higher odds of delinquencies. However, with rates coming down, Wells Fargo’s CRE exposure becomes less of a concern for investors because cheap borrowing costs lead to more property sales and rentals. To be sure, Wells Fargo management said during July’s second-quarter earnings call that the bank will continue to de-risk its office portfolio. (Jim Cramer’s Charitable Trust is long WFC, MS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Federal Reserve Bank Chair Jerome Powell announces that interest rates will remain unchanged during a news conference at the bank’s William McChesney Martin building on May 01, 2024 in Washington, DC.
Chip Somodevilla | Getty Images
Big Wall Street banks and interest rates have a complicated relationship.
Wells Fargo’s latest regulatory hiccup isn’t a doomsday scenario. Shares of Wells Fargo on Friday clawed back some of the prior session’s decline. The stock lost 4% on Thursday after the Office of the Comptroller of the Currency (OCC) said it had issued an enforcement action against Wells. The OCC cited “deficiencies” in the bank’s financial crimes risk management practices and anti-money laundering (AML) controls. Jim Cramer said Friday, however, that the bank’s fundamentals haven’t changed, and the stock’s decline presents a great time to invest. “This is the bank stock to buy, if you want to buy a bank stock,” Jim offered, arguing that the regulatory snag shouldn’t be a huge surprise to the market either. That’s because Wells previously disclosed the OCC’s probe in its second-quarter filing over the summer. The OCC action did not come with a monetary penalty attached. The agency said in a statement that Wells Fargo has already started to take corrective steps to remedy these issues. To be sure, the agreement does require Wells to obtain written approval from the OCC before expanding certain new offerings. “There’s no slap. There’s no fine,” Jim said. That’s why it’s a great time to get into Wells. Jim also said that the Club would also purchase more of the bank stock if he wasn’t restricted. During Thursday’s September Monthly Meeting, he said he would consider Wells Fargo as an honorary 13 core portfolio holding . WFC YTD mountain Wells Fargo (WFC) year-to-date performance But it makes sense why Wall Street may have been initially spooked by the news, which made Wells among the worst performers in the S & P 500 on Thursday. For years, Wells Fargo has faced increased regulatory scrutiny after a fake accounts scandal in 2016 led to billions of dollars in penalties and numerous lawsuits. As a result, the Federal Reserve imposed a $1.95 trillion cap on the bank’s assets in 2018 until it appeases regulators’ concerns. “I understand when this stuff comes out, you think, ‘Oh my god, Wells is back on the red hot griddle,’” Jim said. “But, they’re not.” We’re still confident Wells Fargo will have its growth cap lifted at some point, which will allow the firm to expand its balance sheet, and rake in more profits down the line. It’s unclear when that will take place, but it pays to wait it because the stock offers a nice 3% annual dividend yield. Wells Fargo CEO Charlie Scharf has made significant progress to improve the firm’s compliance and regulatory standing in his roughly five years at the helm of the bank. Under Scharf’s leadership, Wells Fargo has cleared many key regulatory hurdles. Like us, many Wall Street analysts are not concerned about the new OCC enforcement action either. Investors appear to have brushed off worries as well, with Wells Fargo stock up more than 1% on Friday. Raymond James said although the regulatory news is a “negative development,” it doesn’t “change our view that the company is doing everything in its power to correct the misdeeds of the prior management team and improve the overall governance of the bank.” Analysts at RBC Capital Markets said that AML issues “take time to resolve and are costly to fix, [but] we do not believe the agreement will impact the prospects for lifting the Federal Reserve’s [asset cap].” (Jim Cramer’s Charitable Trust is long WFC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
A person walks past the entrance to a Wells Fargo bank branch on Amsterdam Avenue on June 25, 2024, in New York City.
Gary Hershorn | Corbis News | Getty Images
Wells Fargo’s latest regulatory hiccup isn’t a doomsday scenario.
Big banks are jumping headfirst into the AI race. Over the past year, Wall Street’s largest names — including Goldman Sachs , Bank of America , Morgan Stanley , Wells Fargo to JPMorgan Chase — ramped up their generative artificial intelligence efforts with the aim of boosting profits. Some are striking deals and partnerships to get there quickly. All are hiring specialized talent and creating new technologies to transform their once-stodgy businesses. The game is still in its early innings, but the stakes are high. In his annual shareholder letter, JPMorgan CEO Jamie Dimon compared artificial intelligence to the “printing press, the steam engine, electricity, computing, and the internet.” The banks that can get it right should increase productivity and lower operational costs — both of which would improve their bottom lines. In fact, AI adoption has the potential to lift banking profits by as much as $170 billion, or 9%, to more than $1.8 trillion by fiscal year 2028, according to research from Citi analysts . Early-stage generative AI use cases are often for “augmenting your staff to be faster, stronger and better,” said Alexandra Mousavizadeh, co-CEO and co-founder of AI benchmarking and intelligence platform Evident Insights. “Over the course of the next 12 to 18 to 24 months, I think we’re going to see [generative AI] move along the maturity journey, going from internal use cases being put into production [to more] testing external-facing use cases.” Companies are only just starting to grasp the promise of this tech. After all, it was only following the viral launch of ChatGPT in late 2022 that the world outside of Silicon Valley woke up to the promise of generative AI. OpenAI’s ChatGPT, backed by Microsoft and enabled by Nvidia chips, sparked an investor stampede into anything AI. The AI trade also pushed corporate boardrooms in three ways: find use cases for the tech, strike partnerships to enable it, and hire specialized employees to build and support it. MS YTD mountain Morgan Stanley YTD AI use cases for key businesses Morgan Stanley was among the first on Wall Street to publicly embrace the technology, unveiling two AI assistants for financial advisors powered by OpenAI. Launched in September 2023, the AI @ Morgan Stanley Assistant gives advisors and their staff quick answers to questions regarding the market, investment recommendations, and various internal processes. It aims to free up employees from administrative and research tasks to engage more with their clients. Morgan Stanley this summer rolled out another assistant , called Debrief, which uses AI to take notes on financial advisors’ behalf in their client meetings. The tool can summarize key discussion topics and even draft follow-up emails. “Our immediate focus is on using AI to increase the time our employees spend with clients. This means using AI to reduce time-consuming tasks like responding to emails, preparing for client meetings, finding information, and analyzing data,” said Jeff McMillan, head of firmwide AI for Morgan Stanley. He made these comments in a statement emailed to CNBC last week. “By freeing up this time, our employees can focus more on building relationships and innovating.” In the long run, AI could help Morgan Stanley’s wealth business get closer to reaching management’s goal of more than $10 trillion in client assets . In July, the firm reported client assets of $7.2 trillion. To be sure, McMillan said in June it would take at least a year to determine whether the technology is boosting advisor productivity. If it does, that would welcomed news for shareholders after Morgan Stanley’s wealth segment missed analysts’ revenue expectations in the second quarter . WFC YTD mountain Wells Fargo YTD It’s not just Morgan Stanley. Our other bank holding Wells Fargo has its own virtual AI assistant. Dubbed Fargo , it helps retail customers get answers to their banking questions and execute tasks such as turning on and off debit cards, checking credit limits, and offering details for transactions. Fargo, powered by Google Cloud’s artificial intelligence, was launched in March 2023. For a large money center bank like Wells Fargo — one that’s historically catered to Main Street — the Fargo assistant could bolster the bank’s largest reporting segment. The consumer, banking and lending unit in the second quarter accounted for roughly 43% of the $20.69 billion booked in companywide revenue. Striking AI deals, landing partnerships None of this would be possible without partnerships. Big banks have tapped startups and tech behemoths alike for access to their large language models (LLMs) to build their own AI products. In addition to Morgan Stanley’s OpenAI deal and Wells Fargo’s ties with Google, Deutsche Bank also partnered with Club name Nvidia in 2022 to help develop apps for fraud protection . BNP Paribas announced on July 10 a deal with Mistral AI — often seen as the European alternative to OpenAI — to embed the company’s LLMs across its customer services, sales and IT businesses. Shortly after that, TD Bank Group signed an agreement with Canadian AI unicorn Cohere to utilize its suite of LLMs as well. “We watch out for these [deals] because that means they are onboarding a lot of that capability,” Evident’s Mousavizadeh said. Big AI hires for top Wall Street firms Banks have also had to do a lot of hiring to make their AI dreams come true — poaching swaths of data scientists, data engineers, machine learning engineers, software developers, model risk analysts, policy and governance managers. Despite layoffs across the banking industry, AI talent at banks grew by 9% in the last six months, according to July data from Evident , which tracks 50 of the world’s largest banks. That was double the rate of growth seen in total headcount across the sector. Mousavizadeh said that one of the major “characteristics of the leading banks in AI is that they’re not stopping hiring. The leading banks are the [ones] that are hiring the most AI talent.” In July, Wells Fargo named Tracy Kerrins as the new head of consumer technology to oversee the firm’s new generative AI team. And Morgan Stanley’s McMillan was promoted to AI head in March after serving as a tech executive in the wealth division. He’s helped oversee Morgan Stanley’s OpenAI-related projects. JPMorgan last year also appointed Teresa Heitsenrether as its chief data and analytics officer in charge of AI adoption. Bottom line The more we see these firms spend and invest in AI talent, the more serious they appear to be about the future of the nascent tech. We don’t expect these third-party partnerships, new use cases, and slew of hires to create exponential returns overnight. However, As long as these costs don’t outweigh return on investment (ROI), we’re happy with Wells Fargo and Morgan Stanley’s moves to innovate. “We’re very much in the foothills of this, and we’re going to see much more ROI generated off the AI use cases in 2025,” Mousavizadeh said. “But, I think you’re going to see a real tipping point in 2026.” (Jim Cramer’s Charitable Trust is long NVDA, WFC, GOOGL, MSFT, MS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Pedestrians walk along Wall Street near the New York Stock Exchange (NYSE) in New York, US, on Tuesday, Aug. 27, 2024.
Jim Cramer’s daily rapid fire looks at stocks in the news outside the CNBC Investing Club portfolio. Lowe’s : The home improvement retailer beat on earnings but missed on revenues. Lowe’s also cut its full-year outlook. Shares were higher earlier but turned modestly negative. “The stock is hanging because of the Federal Reserve. No one wants to this stock ahead of Jackson Hole,” Jim Cramer said Tuesday. Lowe’s says it needs housing to be better. “The Fed lowers [rates], we get transactions.” Medtronic : The medical devices giant raised its full-year outlook after beating quarterly estimates. The stock rose 3%. “I know that Medtronic has been one of my faves,” Cramer said. “I’m not sure about this one.” Amer Sports : The company behind the Salomon and Wilson brands delivered better than expected quarter. The stock jumped more than 12%. “This one has been one that’s been a disappointment. Maybe it’s finally showing some life,” Cramer said. Vornado Realty : The real estate investment trust got a double upgrade to buy from sell at Evercore ISI. Shares rose modestly to a 52-week high. Many people think “it’s a bridge too far to think that city real estate can come back,” Cramer said. He stressed that’s not the case. “It’s good.” Abercrombie & Fitch : The retailer was named a positive catalyst idea at Citi. The stock was little changed. “The company has been money over and over and over again.”
Jim Cramer’s daily rapid fire looks at stocks in the news outside the CNBC Investing Club portfolio. Merck : The drugmaker reported a better-than-expected quarter. It raised its full-year sales outlook but was still a little short of estimates. The stock lost nearly 9%. Merck’s acquisition of Acceleron and its pulmonary arterial hypertension treatment three years ago for $11.5 billion is about to pay off. The FDA approved it. Jim Cramer said Tuesday he would take advantage of the dip and buy Merck ahead of the benefit from this drug. Pfizer : Better-than-expected sales and adjusted earnings, as well as a full-year outlook raise, were not enough to keep the stock higher. It fell 2.5%. Cramer was fairly non-committal on the name. “Pfizer is fine. Not great. Not bad.” PayPal : The digital payments company reported a better-than-expected quarter. The new CEO, Alex Chriss, knows what he’s doing, Cramer said. “I would buy the stock.” Howmet Aerospace : The maker of parts for the aerospace and transportation industries delivered a better-than-expected second quarter and the stock soared more than 13%. “The demand for anything aerospace is intense,” Cramer said. “That means this company can make you money.” SoFi Technologies : The financial services company shares were slightly higher after earnings Tuesday but have since fallen. “It can’t get traction,” Cramer said. That’s because investors want growth like a bank and CEO Anthony Noto is trying to make it “more like a software company,” he said.
Investment banking was the rock star of big bank earnings this season. Club holdings Morgan Stanley and Wells Fargo , along with JPMorgan Chase , Goldman Sachs , Bank of America and Citigroup , saw double-digit percentage growth in revenues for their investment banking businesses. Meanwhile, fees from the five largest U.S. investment banks, which include Morgan Stanley, Goldman, JPMorgan, Citi and Bank of America, came in at roughly $8.2 billion during the second-quarter, a 40% increase since the year prior. For Club stock Morgan Stanley, investment banking revenues surged 51% year over year with equity underwriting fees jumping over 56%, and advisory fees increasing over 30% from the year-ago period. Investment banking falls under Morgan Stanley’s institutional securities division. This was welcome news because Morgan Stanley’s IB business is a crucial part of our investment thesis. We’ve been betting on a rebound in the firm’s dealmaking segment after two lackluster years. Macroeconomic uncertainty, combined with higher borrowing costs, weighed on mergers and acquisition (M & A) business and initial public offerings (IPO) activity since the Federal Reserve began raising interest rates in 2022. We boosted our price target to $120 apiece from $98 after results, forecasting more upside for the stock into 2025. This implies a more 16% increase from Friday’s close. MS YTD mountain Morgan Stanley (MS) year-to-date performance Traditional lenders and money centers like Wells Fargo also benefitted from the pickup in deals. Wells Fargo’s investment banking revenues, which fall underneath its corporate and investment banking (CIB) division, jumped 38% year over year. Investment banking is still a small business at Wells, and well behind its financial peers. The firm brought in $430 million in IB revenues this quarter, compared to Morgan Stanley’s $1.6 billion and JPMorgan’s reported $2.5 billion. But the boost in IB revenues for Wells gives investors a hint of future potential as management continues to invest further into its dealmaking segment. A CNBC analysis in May found that Wells has made more than 17 senior hires in its CIB division since 2023. This helps to diversify Wells’ revenues further, and garner more durable income streams like fees from M & A advisory or underwriting. Plus, the firm will be able to grow its CIB division, generating even more revenues once regulators decide to take Wells Fargo’s $1.95 trillion cap off its assets. The timing on the removal, however, remains unclear. It wasn’t all smooth sailing for the big banks. The Federal Reserve’s strategy of keeping interest rates higher for longer left banks in a tricky spot as customers sought higher-yielding alternatives. This led to a miss in revenues for Morgan Stanley’s wealth management segment. Meanwhile, Wells Fargo stock plummeted on its July 12 earnings results after management maintained its full-year net interest income (NII) outlook to be a roughly 7% to 9% decline from 2023. NII is seen as a solid measure of profitability for a bank’s lending activities. High rates have impacted interest-based revenue streams because customers are taking their assets to higher-yielding products. However, management doesn’t have control over U.S. central bank policy, so we were pleased to see that growth in its fee-based, or non-interest income, was there. Non-interest income came in well ahead of analysts’ expectations for the second quarter, up nearly 19% year over year. We upgraded Wells Fargo’s stock to a buy-equivalent 1 rating on this growth. WFC YTD mountain Wells Fargo (WFC) year-to-date performance “We continued to see growth in our fee-based revenue offsetting an expected decline in net interest income,” Wells Fargo CEO Charlie Scharf said during the July 12 earnings call. “The investments we have been making allowed us to take advantage of the market activity in the quarter with strong performance in investment advisory, trading and investment banking fees.” And good news for investors, it doesn’t look like the rebound in investment banking is slowing anytime soon. In fact, Morgan Stanley CEO Ted Pick said “we’re in the early stages of a multiyear investment banking-led cycle,” he told analysts during the July 16 earnings call. “We are quite convicted on this call.” Meanwhile, Goldman Sachs CEO David Solomon said the financial behemoth is seeing “the early innings of a capital markets and M & A recovery.” Investors are betting that M & A recovery would get even more fuel under a second Donald Trump presidency, which is one reason why financial stocks were strong performers over the past week with politics front and center for Wall Street. An expectation that banks would see easier regulation also figured into the sector’s strength. (Jim Cramer’s Charitable Trust is long MS, WFC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
A combination file photo shows Wells Fargo, Citibank, Morgan Stanley, JPMorgan Chase, Bank of America and Goldman Sachs.
Reuters
Investment banking was the rock star of big bank earnings this season.
It’s been another great run for stocks since the Club’s last monthly meeting in June. The likelihood the Federal Reserve will lower interest rates sooner than later after recent upbeat inflation data pushed stocks to new highs over the past few weeks. Traders now see the odds of a rate cut by September at 100% , according to the CME FedWatch tool . The Dow Jones Industrial Average reached an all-time intraday high on Tuesday, while the S & P 500 did the same Monday. On July 11, the Nasdaq Composite hit new a new high as well. Taking advantage of the overbought market, we’ve executed a series of trades. The Club offloaded shares of TJX Companies on Friday in order to raise some additional cash. Before that, we made sales of Meta Platforms and Palo Alto Networks on July 8, locking in massive gains of 150% and 94%, respectively, since we first purchased both. On the flip side, we’ve looked for opportunities during the tech pullback. We started by initiating a small position in Advanced Micro Devices , a stock we most recently owned in the summer of 2023, and bought more on Tuesday. Through all the portfolio action, a key theme has emerged in the stock market, especially over the past week. Investors are jumping on the chance to get in on sectors outside of Big Tech. The Russell 2000 , which measures the performance of small-cap U.S. stocks, jumped nearly 11% in the past five sessions. Meanwhile, the tech-heavy Nasdaq edged 0.18% lower over the period. Case in point: Some of our biggest winners in 2024, mega-cap stocks like Amazon , Alphabet, Meta and Microsoft posted losses since our last meeting. Amazon is still up 27% for the year, while Alphabet and Meta jumped 31% and 38%, respectively. Other losers included our stocks with heavy ties to China: Wynn Resorts , Starbucks and Estee Lauder . All said, 12 of the portfolio’s 34 stocks were in the red. We see the market rotation playing out in our top-five performing names as well. From the June 27 close through Tuesday, only one company is in mega-cap tech. Here’s our top five and what’s driving the gains for each: 1. Ford Motor: 17.7% There wasn’t a single catalyst for Ford Motor’s outperformance. Investor sentiment, however, looks to have improved on signs that sales are picking up. Shares of the automaker rose on July 3 after the company said hybrid vehicle sales surged 56% in the second quarter, which set a new quarterly sales record for the segment. On July 11, the stock jumped again after June’s consumer price index (CPI) print indicated easing inflation and strengthened the Fed’s case to lower rates — an environment that could lead to more consumers buying Ford’s vehicles. The stock reached a 52-week high of $14.43 apiece on Monday. 2. Morgan Stanley: 10.9% Would a second presidency for Donald Trump benefit big U.S. banks? Investors in Morgan Stanley seem to think so. Shares advanced after President Joe Biden and Trump squared off during the June 27 presidential debate , which many viewed as a big win for the former president. Morgan Stanley’s momentum continued into July and hit an all-time high of $109.11 on Tuesday after the bank posted a largely better-than-expected second quarter report . We raised our price target to $120 from $98 apiece after results. 3. Stanley Black & Decker: 10.5% Stanley Black & Decker shares surged on recent signs of forthcoming monetary policy easing, which could spur housing market activity because of lower borrowing costs. More homeowners means more demand for the DeWalt parent’s offerings as buyers look for tools needed to fix things around the house. This, along with investors looking for pockets outside of Big Tech, have sent the stock higher since July 1. Shares of the company climbed 3.5% on Tuesday, and the Club capitalized of the stock’s advance, trimming our position in the afternoon. To be sure, we still see long-term gains ahead once the Fed starts to cut. 4. Apple: 9.7% Apple hit a record high of $237.23 apiece on Monday after Morgan Stanley listed the stock as a top industry pick. The Wall Street analysts said that the company’s artificial intelligence efforts will cause a much-needed upgrade cycle for the company’s flagship iPhone. Morgan Stanley also hiked Apple’s price target to $273 apiece from $213, a more than 16% upside from Tuesday’s close. It’s not like the stock was stalled: Shares have been climbing for months on excitement about Apple’s AI plans, which were recently unveiled at the company’s worldwide developers conference on June 10. 5. Dover: 7.3% Dover began its ascent higher on July 9 as capital rotated into sectors that benefit more from interest rate cuts. Dover is an industrial name, producing thermal connectors that are used in one of the fastest-growing end markets: data centers. This makes Dover a great under-the-radar AI play. “Dover is going to be a big name for me,” Jim said recently. Shares hit an all-time high Tuesday of $190.54 each, and closed the day nearly 3% higher. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
A trader works, as a screen broadcasts a news conference by U.S. Federal Reserve Chair Jerome Powell following the Fed rate announcement, on the floor of the New York Stock Exchange in New York City, U.S., June 12, 2024.
Brendan Mcdermid | Reuters
It’s been another great run for stocks since the Club’s last monthly meeting in June.
When Charlie Scharf took the reins at Wells Fargo five years ago, the bank was in turmoil. A series of scandals landed it in the regulatory doghouse — dealing a major blow to the 172-year-old firm’s reputation and leading to a multi-billion-dollar plunge in its stock market value. Fast forward to 2024: Wells Fargo looks like a different bank altogether — and despite Friday’s post-earnings decline, the turnaround is still humming. Wells Fargo tumbled more than 6% to under $57 per share after missing expectations on quarterly net interest income (NII), a key measure of lending profitability. Investors on Friday were more concerned about NII weakness than overall second-quarter revenue and earnings per share (EPS) beats. Management’s drive under Scharf into fee-based businesses such as investment banking helped offset softer NII. However, since investment banking revenue is tied to compensation, the bank had to raise its expense outlook for the year. That’s a good problem to have. In Friday’s earnings commentary , the Club upgraded Wells Fargo back to our buy-equivalent 1 rating — viewing Friday’s drop as an opportunity to add shares. Expansion into new markets has been a hallmark of Scharf’s tenure, along with an overhaul of senior leadership and an improved standing with regulators. Taken together, it shows just how far the CEO has gone to rehabilitate Wells Fargo. Investors have taken notice. Despite Friday’s setback, shares of Wells Fargo are still up more than 15% so far this year, compared to 13% for the KBW Nasdaq Bank Index , which tracks the performance of major U.S. banks. Since Scharf was announced as CEO in September 2019, Wells Fargo shares gained 12.5% — on par with the banking sector. The stock hit a multiyear high of $62.55 per share in May, which was only a few dollars off its January 2018 all-time record close of nearly $66. “Scharf has done an incredible job fixing up Wells Fargo,” said Jeff Marks, director of portfolio analysis for the CNBC Investing Club. “Before he joined, the bank had a bloated cost structure, lagged in technology, and suffered from a horrible reputation. Scharf and his team have right-sized costs, invested in tech, and materially enhanced the bank’s risks and controls.” A big part of Scharf’s job has been moving the company through all the regulatory hurdles that were put in place after the scandals of the late 2010s. In 2016, Wells was found to have opened millions of unauthorized bank accounts under customer names as employees tried to meet high-pressure sales goals. Just a year later, the bank was accused of charging hundreds of thousands of people for auto insurance they did not need, many of which resulted in delinquencies. Among those affected were active duty military service members. That same year, Wells Fargo admitted to improperly charging home lending customers for mortgage-rate-lock extensions as well. WFC YTD mountain Wells Fargo (WFC) year-to-date performance The Federal Reserve ordered Wells Fargo to freeze its balance sheet in 2018, keeping its assets below $1.95 trillion until senior management cleaned up its act. The most recent sign that Scharf is repairing that damage came in February when the company cleared a major regulatory hurdle tied to the 2016 fake accounts scandal. The bank said in a release that the Office of the Comptroller of the Currency terminated a consent order, or penalty, that forced it to change how it sells its retail products and services. This was a “huge accomplishment” and another big step toward removing the Fed’s asset cap, said Bank of America analyst Ebrahim Poonawala. “As we know, getting regulatory issues resolved is not an easy task for large organizations, and I think that if the bank can get out of the asset cap over the next year or so, that will be a big boost of additional credibility for Charlie and his leadership,” he added. The asset cap places a constraint on Wells Fargo’s growth by prohibiting the bank from doing more lending and, in turn, increasing interest incomes. It also keeps the bank from acquiring other high-growth companies or making strategic investments that could increase its assets beyond that nearly $2 trillion threshold. To be sure, Scharf and Wells are not out of the woods yet. The bank has cleared six of 14 consent orders from the Office of the Comptroller of the Currency. While they don’t all need to be cleared before the U.S. central bank lifts the cap, more progress is still needed. During a banking conference in May, Scharf said Wells had eliminated the aggressive sales targets and certain incentive plans at branches that initially spurred bad behavior. The bank has also paid billions to regulators over the years. In 2022, the Consumer Financial Protection Bureau ordered Wells to dish out $3.7 billion alone for violations across its auto loans, mortgages and deposit accounts. But ultimately, it’s up to the regulators to decide if the cap will be removed. “We have to close these orders. We have to build the controls and make them part of the company,” Scharf said. “So, we’re not declaring victory.” In addition, Wells Fargo’s investment banking business, while growing, is small in comparison to the other banking behemoths that also reported Friday. Revenue from Wells Fargo’s investment banking segment in the second quarter jumped 38% year over year to $430 million. JPMorgan Chase ‘s investment banking revenue surged 46% to $2.5 billion. The Club’s other bank, Morgan Stanley , also has a bigger investment banking division. It reports earnings on Tuesday. There’s still a lot to celebrate, however. Wells Fargo parted with most of its senior management from its pre-2019 era and remade its board of directors. Eleven out of the 15 members on Wells Fargo’s senior leadership team have joined since Scharf assumed his role. The same goes for six out of the 13 board members for the financial behemoth. Poonawala said the new hires will help change the company’s culture and build back its reputation for honesty and trust. “I think not having sort of a lot of intense legacy [in management] helps,” he said, adding: “If you look at the org structure, most of these executives are new to the bank during his operating committee. When you look at the turnaround and how this plays out, he’s been able to attract a lot of high-quality talent from competitors, and I think that helps” when fixing a company. Scharf’s plan to move Wells beyond its traditional lending roots is also well under way. A CNBC analysis in late May found that Wells Fargo made at least 17 senior-level hires in its corporate and investment banking (CIB) division since the start of 2023. Under Scharf’s leadership, the bank has poached top talent from Wall Street peers like Scharf’s former employer, JPMorgan Chase. For example, Doug Braunstein, an M & A veteran who spent nearly two decades at the bank, joined Wells Fargo as vice chairman in February to oversee its corporate finance and advisory businesses. “Wells Fargo has historically been known as more of a mortgage bank, but they’ve taken some measures to reduce their sensitivity to the mortgage environment,” Raymond James analyst David Long said in a recent interview. “Charlie and his team brought in several high-ranking bankers in the investment banking arena, and we’re starting to see positive results in that regard.” He added: “The higher-for-longer [interest rate] environment is not conducive to more M & A and other investment banking transactions, but if rates do start to come down, we’re likely to see a pickup in that business, which Wells would be a beneficiary of.” Thursday’s cooler consumer inflation report boosted the case for the Fed to start cutting interest rates, with market odds growing for as many as three cuts by year-end. An expansion into investment banking is beneficial for Wells Fargo because it allows the firm to rely less on interest-based revenues, which are at the mercy of the Fed’s monetary policy. Remember, management forecasted a NII decline between 7% to 9% for fiscal year 2024, and second-quarter earnings on Friday showed that it will likely come in at the top of that range. This is because customers are moving their funds to higher-yielding products as rates stay higher for longer. Instead, fee-based incomes — like those from advisory costs on M & A deals and other IB transactions — are a more durable and less volatile revenue stream. “We continued to see growth in our fee-based revenue offsetting an expected decline in net interest income,” Scharf said on Friday. “The investments we have been making allowed us to take advantage of the market activity in the quarter with strong performance in investment advisory, trading and investment banking fees.” Marks said the exec’s strategy is “really working,” citing the second-quarter’s 19% year-over-year increase in non-interest income, which handily beat expectations. “Fee revenues were fantastic, we continue to see Charlie Scharf really make a really big push into this. He’s gone on a hiring spree lately, hiring a lot of ex bankers throughout the industry,” Marks said on Friday. “He wants to make the bank less tied to the yield curve and more tied to the sticky fee-based revenues, but it’s going to take time.” (Jim Cramer’s Charitable Trust is long WFC, MS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Charlie Scharf, CEO, Wells Fargo, speaks during the Milken Institute Global Conference in Beverly Hills, California on May 2, 2023. speaks during the Milken Institute Global Conference in Beverly Hills, California on May 2, 2023.
Patrick T. Fallon | Afp | Getty Images
When Charlie Scharf took the reins at Wells Fargo five years ago, the bank was in turmoil. A series of scandals landed it in the regulatory doghouse — dealing a major blow to the 172-year-old firm’s reputation and leading to a multi-billion-dollar plunge in its stock market value.
Fast forward to 2024: Wells Fargo looks like a different bank altogether — and despite Friday’s post-earnings decline, the turnaround is still humming.
Jim Cramer’s daily rapid fire looks at stocks in the news outside the CNBC Investing Club portfolio. Bank of America : Piper Sandler upgraded the stock to neutral from underweight (hold from sell) and raised its price target to $42 per share from $37. “It’s becoming the Buffett bank,” Jim Cramer said Tuesday ahead of next week’s earnings. “You’re seeing a recognition that their bond portfolio wasn’t really a danger after all.” Warren Buffett’s Berkshire Hathaway owns a huge stake in BofA. RH : Stifel started coverage of the company formerly named Restoration Hardware with a buy and a $315-per-share price target. CEO Gary Friedman sees an inflection point. “I don’t want to bet against Gary,” Cramer said. “He’s bought a huge amount of stock.” Intel : The struggling chipmaker was trying to rally for the fifth session in a row. Cramer said he’s not a fan of the stock but “every dog has its day.” Netflix : Cowen increased its price target on the stock ahead of earnings next week. “There’s nothing new driving that damn stock,” Cramer said. “It doesn’t matter, though.” Smurfit Westrock : Stifel started coverage of the paper-based packaging company with a buy rating and a $65.70-per-share price target. “There’s been tremendous consolidation in that industry. And yet, it’s still not really been able to get rolling,” Cramer said.
Jim Cramer’s daily rapid fire looks at stocks in the news outside the CNBC Investing Club portfolio. Corning : Shares of the specialty materials company popped more than 10.5% on Monday after pre-announcing better-than-expected earnings. Management is now forecasting higher revenue and earnings-per-share on the high end of previous guidance for the second quarter. The company is set to report on July 30. Shares of Corning, which makes glass for Apple devices, reached their highest levels since February 2022. Tesla : Shares of the electric vehicle leader made a huge, 27% increase last week after the company delivered better-than-expected second-quarter production and deliveries. The stock jumped another nearly 3% on Monday. Cramer called the rally a short squeeze — meaning investors betting Tesla stock would go down were forced to cover as it ripped higher. JPMorgan : The bank caught a rare downgrade, with Wolfe Research taking its rating to peer perform from outperform (hold from buy) on valuation and exposure to lower net interest income given the threat of lower Federal Reserve interest rates approaching. Cramer said he’s concerned heading into JPMorgan’s second-quarter earnings Friday since there was a big sell-off following its Q1 release in April when the bank guided flat NII for 2024. “I don’t want the stock coming in hot,” he added. Domino’s Pizza : The pizza delivery chain was upgraded to an outperform rating from a neutral (buy from hold) at Baird. The analysts also raised their price target to $580 per share from $530. Baird sees the recent 7.4% pullback in Domino’s stock over the last eight sessions as an opportunity. They cited strong fundamentals, product pipeline, and management. Cramer thought this was a fair call since Domino’s CEO Russell Weiner is “crushing it.” ServiceNow : Shares of the enterprise software company took an over 4% dive on Monday after Guggenheim downgraded the stock to sell from neutral. The analysts said the company will get a boost from its generative artificial intelligence business in the second half of this year but won’t see that momentum into 2025. Cramer said the call was contrary to CEO Bill McDermott’s stance that generative AI offerings have been resonating with customers.
Jim Cramer’s daily rapid fire looks at stocks in the news outside the CNBC Investing Club portfolio. T-Mobile : The wireless carrier announced plans to pay $4.4 billion to buy most of U.S. Cellular . “Who am I to doubt [T-Mobile CEO] Mike Sievert? They got some growth. So stock going higher,” Jim Cramer said Tuesday. T-Mobile was up just under 1%. U.S. Cellular rose more than 1%. Viking Holdings : The cruise line operator’s stock saw lots of analyst initiations. The company went public on May 1. “They don’t want kids, and they don’t want gambling,” and that’s the appeal of Viking, Cramer said. Airbnb : Shares of the short-term rental company were upgraded to a buy-equivalent outperform rating at Wedbush. “I felt that the quarter was excellent. The app is really good. I disagreed with the market. It’s a hard thing to do. Wedbush is basically giving you the bull case,” Cramer said. Shares dropped 7% after its earnings report on May 9 and were still down $10 since the Friday’s close. Huntington Bancshares : The regional bank stock was upgraded to a buy-equivalent overweight rating at JPMorgan. “I thought that the upgrade made very little sense. But I recognize that Huntington Bancshares is in a good state,” Cramer said. Texas Instruments : CNBC reported that activist investor group Elliott Management has taken a $2.5 billion stake in the chipmaker. Cramer said Texas Instruments didn’t make the right moves with customers and shareholders and that’s why Elliott moved in.
Wells Fargo is breaking out of its lending roots. The bank has quietly gone on a hiring spree to grab a bigger slice of the profitable investment banking business long dominated by its Wall Street rivals. Since the start of 2023, a CNBC analysis found that Wells Fargo made at least 17 senior-level hires in its corporate and investment banking (CIB) division. Leaning on the expertise of its rivals, many of the newly employed executives previously worked at the likes of JPMorgan Chase and other big banks. Expanding investment banking “improves our outlook” on Wells Fargo stock, according to Jeff Marks, director of portfolio analysis for the CNBC Investing Club. “Adding more fee-related revenues to the overall picture makes the bank’s profits less hostage to the bond market yield curve and could improve the overall return profile of the bank.” He added, “Wells Fargo could fetch a higher multiple in the market as a result.” It’s no wonder CEO Charlie Scharf wants a bigger slice of businesses like investment banking, which garner huge revenue from fees. Services like underwriting for initial public offerings (IPO) and facilitating mergers and acquisitions (M & A) allow banks to take home a percentage of these deals and advisory fees. Fees are a more durable and less volatile revenue stream than what Wells Fargo has historically focused on. This is important because, as Scharf said in the bank’s 2023 annual report , the CIB division has positioned Wells Fargo to “increase our fee-based revenues” and “increase our returns overall.” At the top of the recent hire list, however, is Doug Braunstein, a JPMorgan veteran who was brought in as vice chairman in February to help steer Wells Fargo’s corporate finance and advisory businesses. During nearly 20 years at JPMorgan, Braunstein held many roles including chief financial officer, head of investment banking in the Americas, and head of global mergers and acquisitions. Fernando Rivas was named earlier this month co-CEO of corporate and investment banking at Wells Fargo. Formerly head of North American Investment Banking at JPMorgan, Rivas will lead CIB together with Jonathan Weiss, who had been the sole CEO of the division since February 2020. Weiss, also a JPMorgan alum, has been at Wells Fargo since 2005. Rivas had been at JPMorgan for three decades. In addition to those high-profile hires, CNBC found that Wells Fargo also poached top talent from other financial behemoths such as Barclays , Deutsche Bank , Piper Sandler, and now-defunct Credit Suisse — all within the past year. A Wells Fargo spokesperson declined to comment on the total number of CIB-related hires across all levels in the division. However, Wells Fargo’s Scharf said in the press release announcing Rivas’ hire, “We have added over 50 senior bankers and traders since 2020 and have seen the positive impact with increased revenue and market share.” Break from tradition Management has long relied on interest-based revenue streams like net interest income (NII) from its retail and business customers. NII is the difference between what a firm makes on loans versus what it pays for customer deposits. Wells Fargo and other banks have benefited in recent years as the Federal Reserve began hiking interest rates in March 2022. That’s because the cost of borrowing goes up much more than what customers earn on deposits. However, as rates have stayed higher for longer, customers began to withdraw some of their deposits for higher-yielding offerings like money market funds. Wells Fargo said NII decreased 8% during the first quarter, citing interest rate dynamics. Full-year guidance for NII is also expected to decline in the 7% to 9% range. That’s the double-edged sword of rates, which are now expected to be cut by the Fed later this year, and why Wells Fargo was glad to see its CIB-related investments pay off in the first quarter. The division saw a 1.6% increase in revenue to $4.98 billion. During the April 12 post-earnings conference call, Scharf said the bank is “beginning to see early signs of share and fee growth which will be important as we diversify our revenues and reduce net interest income as a percentage of revenue.” From 2019 to the end of 2023, Wells Fargo’s overall investment banking share moved up two ranks in the U.S. market to No. 6, management said in an annual report , citing Dealogic figures. More recent data indicates that Wells Fargo’s investment banking revenue share globally has jumped to No. 7 from No. 12 year-over-year, as of Tuesday. In the investing banking subset of M & A, Wells Fargo has been garnering more fees. The bank has been tapped for a series of high-profile deals as well, including Kroger ‘s attempted nearly $25 billion acquisition of Albertson’s in October 2022. The transaction is in limbo after the Federal Trade Commission filed a lawsuit to block the merger in February . In IPOs, Wells Fargo was among the lead book-running managers of recent IPOs: cruise line Viking and data management firm Rubrik . Wells Fargo shares, which began their upward trajectory back in November, gained more than 50% in the past 12 months — and about half that gain in 2024 alone. That’s roughly double the S & P 500 ‘s performance on both measures. The stock saw its highest close last week of $62.55 since mid-January 2018. Shares have pulled back a bit since then but remain only about 7.5% away from its all-time high close of $65.93 at the end of January 2018. In recognition of that strength, the Club trimmed its Wells Fargo position in late April and booked a healthy profit on the trade. While still bullish, we wanted to reduce the stock’s overall weighting in a show of portfolio discipline. It was near the 5% threshold that we don’t like exceeding in order to run a diversified portfolio. The Club has a 2 rating on the stock and a $62 price target . WFC mountain 2018-01-26 Wells Fargo since record high close on Jan. 26, 2018 Moving forward Wells Fargo’s CIB expansion bodes well once the firm’s Fed-imposed $1.95 trillion asset cap is gone. Although the timing is uncertain, Wells Fargo secured a key win with regulators in February after the Office of the Comptroller of the Currency terminated a penalty tied to the bank’s 2016 fake accounts scandal. That so-called consent order was believed to be a major factor in the Fed’s decision to cap Wells Fargo’s asset levels in 2017. Those regulatory burdens for past misdeeds at the bank predated Scharf’s tenure who has been clearing them since becoming CEO in 2019. Piper Sandler analyst Scott Siefers has said that Wells Fargo will be able to compete more effectively against other large Wall Street firms once the growth cap is removed. “Wells Fargo on a relative basis is very undersized in businesses such as investment banking,” Siefers told CNBC in March . “So, one part of the investment banking business is being able to commit capital. In other words, put some risk on your balance sheet. But thanks to the asset cap, Wells has not been able to build out its investment bank to the same degree, as have some of its other peers.” (Jim Cramer’s Charitable Trust is long WFC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
A woman walks past Wells Fargo bank in New York City, U.S., March 17, 2020.
Jeenah Moon | Reuters
Wells Fargo is breaking out of its lending roots. The bank has quietly gone on a hiring spree to grab a bigger slice of the profitable investment banking business long dominated by its Wall Street rivals.
CNBC’s Jim Cramer on Tuesday praised Goldman Sachs for its ability to course-correct after making mistakes, citing a new report about a possible exit of a challenged business. Goldman Sachs is in discussions to sell its credit card partnership with General Motors to Barclays, according to The Wall Street Journal. A move in this direction would be part of the bank’s multiyear effort to step away from consumer banking. Last year, the Journal reported Apple and Goldman were winding down their credit card relationship. GS YTD mountain GS year to date performance. “I continue to like the stock of Goldman Sachs because … they make mistakes and then they change,” Cramer said on ” Squawk on the Street .” Shares of Goldman, where Cramer worked early in his Wall Street career, were modestly lower Tuesday. “If Goldman comes down [more], you buy the stock because when you get out of these things that are not your core competence, your stock’s going to go higher,” he said. Cramer’s Charitable Trust, the portfolio used by the CNBC Investing Club, doesn’t own Goldman but does own Morgan Stanley and Wells Fargo . The Trust also has a position in Apple.
Stocks hit a rough patch after the Club’s March Monthly Meeting as Wall Street grappled with increasing odds of higher-for-longer interest rates. The S & P 500 and Dow Jones Industrial Average dropped more than 3%, respectively, from the close on the March 27 meeting day through Tuesday’s session. The tech-heavy Nasdaq Composite experienced a more-than-4% loss during the period. The losses would have been steeper if not for the strong start to this week. On Monday, the S & P 500 and Nasdaq snapped six-day losing streaks and followed that up with additional gains Tuesday. The sell-off had dragged the market into oversold territory, according to the S & P 500 Short Range Oscillator. That prompted the Club put its arsenal of cash to work , selectively purchasing shares of high-quality companies at attractive levels. After Tuesday’s gains, the market is no longer oversold, according to the S & P Oscillator. Here are our five top-performing stocks since the March Monthly Meeting. They span four sectors, ranging from financials to tech. WFC YTD mountain Wells Fargo (WFC) year-to-date performance Wells Fargo led the way, with shares jumping 5.8% over the period. The stock received a nice boost following the bank’s first-quarter earnings release — albeit on a delayed reaction. Wells Fargo beat on the top-and-bottom lines and disclosed a sizeable increase in stock buybacks during the period compared with the fourth quarter. “Talk about a vote of confidence,” Jim Cramer said after the results, referring to the boost in buybacks. The Club also was upbeat on management’s remarks about fee-based incomes growing as a percentage of Wells Fargo’s total revenue. Jim argued that fees reduce volatility and provide a great form of annuity for the bank. GOOGL YTD mountain Alphabet (GOOGL) year-to-date performance Alphabet stock rose 4.9% since the March Monthly Meeting, placing the Google parent in second place on the gainers list. Investor sentiment improved leading up to a string of generative artificial intelligence-related announcements during the company’s cloud-computing summit , Google Cloud Next. Most notably, Alphabet on April 9 announced a new Arm -based server chip and several generative AI service offerings. The event gave the Club more assurance of the company’s ability to compete in the heated AI arms race among Big Tech players. Shares hit an all-time high of $159.41 apiece on April 11, the final day of Google Cloud Next. The stock gave back some of those gains in the sessions that followed, but it is still less than 1% below its record peak. It closed Tuesday at $158.86 per share. PANW YTD mountain Palo Alto Networks (PANW) year-to-date performance Palo Alto Networks occupies the No. 3 spot, with shares advancing 4% since the March 27 close. The gains are welcome for the stock, which continues to trade well below where it did before a brutal post-earnings sell-off in late February. Although we don’t see one individual catalyst for the recent upswing, the Club holding continues to benefit from signs of increased demand for its cybersecurity offerings as the threat environment remains elevated. On March 30, for example, AT & T said that the telecommunications company was looking into a leak that resulted in millions of customers’ data getting published on the dark web. “Buy some Palo Alto on this,” Jim said after the high-profile cybersecurity incident. “We like that [stock.]” During the Club’s March Monthly Meeting, Jim told members that he’s tempted to add to our position if the stock falls under $280 per share — and we did just that April 8, picking up 25 shares around $268 each . EL YTD mountain Estee Lauder (EL) year-to-date performance Estee Lauder stock added 2.7% since the March Monthly Meeting, occupying the fourth spot on our list. Shares of the embattled cosmetics retailer have benefited from a slew of bullish Wall Street calls. On March 28, Bank of America upgraded the stock to a buy rating from hold, arguing Estee Lauder’s earnings have bottomed. The firm also raised its price target to $170 per share from $160. A few days later, Citigroup boosted the stock’s rating to buy from hold, adding that the company’s top line also is nearing an inflection point. On Thursday, we issued an upgrade of our own and added to our position that day , with the stock having essentially given up most of its post-earnings gains earlier in 2024. Estee Lauder remains a high-risk and volatile situation, but we’re hopeful that CEO Fabrizio Freda has finally righted the ship. Freda said during Estee Lauder’s most-recent earnings report that the company would return to profitability in the second half of the fiscal 2024 year. DHR YTD mountain Danaher (DHR) year-to-date performance Danaher rounds out the Club’s top performer’s list at No. 5 — and its 7.3% surge after earnings Tuesday is the reason for its inclusion. Overall, Danaher rose 1.7% since the March gathering The life sciences and diagnostics company posted earnings beats across its three main businesses. The results indicated the turnaround in the biotech industry has arrived, which should continue to support orders for Danaher’s offerings. “I have waited and waited and waited for this company to have the inflection, and this is the inflection,” Jim said Tuesday. (Jim Cramer’s Charitable Trust is long GOOGL, WFC, PANW, EL, DHR. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Traders work on the floor of the New York Stock Exchange (NYSE) on April 10, 2024 in New York City. As new inflation data released today showed a continued rise, stocks fell across the board with the Dow falling over 400 points.
Spencer Platt | Getty Images
Stocks hit a rough patch after the Club’s March Monthly Meeting as Wall Street grappled with increasing odds of higher-for-longer interest rates.
What a difference a year makes. Club holding Wells Fargo will post quarterly results on Friday, followed by our other financial holding, Morgan Stanley, on Tuesday. The industry’s first-quarter results will come against a more pleasant backdrop than last year, when the March 2023 collapse of Silicon Valley Bank sent shockwaves throughout the sector. The major banks are also beyond last quarter’s messy numbers as they paid for the FDIC’s regional bank rescue efforts. Meanwhile, the Federal Reserve’s stance on interest rate hikes has also changed from a year ago when central bankers were increasing rates to the current talk about how many rate cuts to expect in 2024. The impact of higher-for-longer interest rates is in focus again this earnings season. Some analysts believe it’s a positive for a key financial gauge for Wells Fargo. We’re also optimistic but want to temper expectations because several factors play into the firm’s performance. Expectations for Fed rate cuts have continued to come down since the start of 2024 when the market ambitiously priced in six reductions. With some recent data signaling an uptick in inflation, including Wednesday’s consumer price index for March, market odds are now in the two-cut neighborhood for this year, with the first projected one to arrive in September. Jim Cramer has been saying repeatedly that the resilient economy could re-ignite inflation and that the Fed should not cut rates anytime soon, if at all, this year. A higher rate environment could lead Wells Fargo to boost full-year net interest income (NII) guidance, which we saw as conservative when it was delivered alongside fourth-quarter 2023 results . At the time, its NII outlook, which assumed five Fed rate cuts this year, hit the stock. WFC YTD mountain Wells Fargo (WFC) year-to-date performance NII is the revenue generated from loans, securities, and other interest-earning assets minus the interest expenses paid on its liabilities like customer deposits. Higher rates can be seen as a positive for Wells Fargo’s NII because the firm relies heavily on its consumer banking and lending segment. It accounted for roughly 44% of overall revenue in 2023. In theory, higher borrowing costs mean Wells Fargo can generate more money from those interest-earning assets, but it’s not that simple. Rates are one of many factors that play into a firm’s interest income, including potentially sluggish loan growth, which was a factor in the fourth quarter. It’s hard to say with the fluid inflation and rate expectations whether Wells Fargo might change its NII outlook when it reports on Friday. During a UBS financial services conference in February, Wells Fargo CFO Mike Santomassimo said the bank is “still very comfortable” with its NII guidance. “When you look at rates in isolation, higher rates, [for a] modestly asset-sensitive business [like Wells] is a positive,” Santomassimo said at the Feb. 26 event. However, he added it’s only “one factor that you sort of have to look at across the whole balance sheet.” Wells Fargo’s expense guidance will also be in focus after the bank barely hit estimates last quarter. Expense control is crucial for Wells Fargo to continue improving its efficiency ratio , a profitability measurement in the banking industry. In the fourth quarter, management indicated that the firm met its multiyear goal to cut expenses by $10 billion. We don’t predict any thesis-changing events in Friday’s release and remain bullish long-term on the bank stock. During Wednesday’s Morning Meeting , Jim said, “I like Wells. Let Wells sell off $3 [per share], and then you buy it.” The stock was above $56 apiece when Jim made his statement, and it traded modestly lower on Thursday. Wells Fargo also has a key long-term growth prospect in the potential removal of its $1.9 trillion Fed-imposed asset cap. This is a big part of our investment thesis and why we have continued to own the stock, though we trimmed some earlier this year when its outperformance resulted in it becoming our largest position. Once the bank gets its growth cap lifted, which we expect next year, Wells Fargo will be able to grow its balance sheet again. Wells Fargo has also been making noise about getting into the investment banking business in a bigger way. In February, Wells Fargo cleared a big regulatory hurdle tied to past misdeeds, which gave us more optimism around CEO Charlie Scharf and the rest of management’s strides to get the growth cap lifted. “Charlie’s got a great handle on things,” Jim said earlier this week. “He’s also a great risk manager.” Shares of Wells Fargo have gained more than 15% year to date — due in part to February’s regulatory victory — but in recent weeks, the financial name has cooled off. Over the past month, the stock was down slightly while the S & P 500 was up more than 1 percent. Morgan Stanley has generally been hurt by higher interest rates over the past two years because they have injected uncertainty into the economic landscape, limiting dealmaking activity for its investment banking division to partake in. Investment banking came back “strongly” in the first quarter of 2024, JPMorgan analysts said in a note to clients this month. Industrywide fees rose 21% quarter over quarter and 10% on an annual basis, the firm said, reaching their highest levels since the first quarter of 2022 — coinciding with the start of the Fed’s rate-hiking campaign . Although these JPMorgan analysts don’t cover Morgan Stanley directly, the improved dealmaking backdrop is encouraging for our financial holding’s once-lucrative investment banking business. After booming during the early parts of the Covid pandemic, the segment has lagged for over a year amid muted mergers & acquisitions (M & A) activity and a weaker initial public offering (IPO) market. In a note to clients last week, Jefferies analysts similarly said investment banking activity has “begun to rebound,” adding that an increase in M & A announcements “bodes well” for Morgan Stanley’s advisory revenues during the second half of 2024. Morgan Stanley served as a financial advisor to Discover in Capital One’s $35 billion acquisition of the credit-card issuer, which was one of the biggest deals announced in the first quarter of the year. MS YTD mountain Morgan Stanley (MS) year-to-date performance The Club agrees with the Wall Street firms, considering the many signs we’ve seen that indicate the dealmaking environment is improving. In addition to increased acquisitions, there’s been a slew of big-name IPOs already in 2024. Morgan Stanley’s investment banking services were tapped for big public debuts from the likes of Wilson tennis racket maker Amer Sports and chip firm Astera Labs , both of which are in the top five IPOs so far this year based on money raised, according to Jefferies. Perhaps most notably, Morgan Stanley was a lead underwriter for Reddit’s multibillion-dollar IPO in March. The stock debuted at around $34 per share and is trading around $45 per share Thursday. Reddit’s successful debut on the New York Stock Exchange can be viewed as a positive for both investors’ current appetite and the future dealmaking environment. And our hope is private companies that want to go public will choose Morgan Stanley as a facilitator for their future offerings. Morgan Stanley earns a fee based on the size of the IPO and for selling the stock to investors. Elsewhere, margins in Morgan Stanley’s wealth management division will be under scrutiny after leaving plenty to be desired in the fourth quarter. One factor that weighed on profitability in the segment, which houses online brokerage E-Trade, was that clients were moving their deposits into higher-yield accounts in a process sometimes called “cash sorting.” However, deposit trends generally seem to have stabilized, according to Jefferies analysts. And a more supportive market should help Morgan Stanley’s margins, analysts suggested. We want to see the firm get back on track toward its previously issued goal of 30% operating margins for the segment down the line. Under recently departed CEO James Gorman, Morgan Stanley embarked on an aggressive push into asset and wealth management, in a bid to become less reliant on the boom-and-bust nature of its traditional investment banking operations. The firm bought E-Trade in 2020 as part of that transformation, but the brokerage has become “sleepy,” Jim said, during the Club’s most recent Monthly Meeting, alongside a plea for management to improve the bank’s overall performance. “New CEO Ted Pick has to come out swinging on this next conference call about how he’s going to grow revenues in a faster, less-complacent pace,” Jim said. “He’s got a better IPO market to crow about, but this company has been a big disappointment versus some others in the industry.” Shares of Morgan Stanley tumbled 5% on Thursday after The Wall Street Journal reported that multiple federal regulators are probing the bank for its wealth management practices. To be sure, the report cited people familiar with the matter and has not been confirmed yet. With the information the Club has now, though, we think the stock decline was a market overreaction. Still, Thursday’s losses add on to an overall lackluster 2024 performance for the stock. Morgan Stanley shares have now lost nearly 7% year to date, compared with a roughly 8% gain for the S & P 500 financials sector. (Jim Cramer’s Charitable Trust is long WFC, MS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
A woman walks past Wells Fargo bank in New York City, U.S., March 17, 2020.
