Jamie Dimon leads the triumphant earnings of major banks

**Wall Street Predicts Achievable Soft Landing for US Economy**
After a period of pessimism and recession predictions, experts on Wall Street are now optimistic that the US economy can achieve a “soft landing.” This scenario entails a fade in inflation without the need for a recession that would harm employment rates. Notably, year-over-year inflation has dropped from a four-decade high of 9% to just 3% in June. In addition, the S&P 500 has seen an increase of approximately 18% year-to-date, leading to growing hopes of a soft landing among investors.

**Consumer Sentiment and Strong Earnings Fuel Optimism**
The University of Michigan’s Consumer Sentiment Index reflects this optimism, as it jumped to 72.6 in July, the highest level in almost two years. This increase is the largest month-over-month rise since December 2005, indicating that Americans are feeling more optimistic about the state of the economy. This sentiment is further supported by the strong earnings reported by multiple big banks. JPMorgan Chase and Wells Fargo both exceeded Wall Street’s expectations for revenue and earnings in the second quarter, thanks to higher interest rates that boosted their net interest income.

**JPMorgan’s Impressive Performance**
JPMorgan managed to generate $41.3 billion in revenue in the second quarter, surpassing analysts’ consensus estimate of $38.9 billion. Moreover, its net income increased by 67% from the previous year to reach $14.4 billion. The bank’s success can be attributed to rising interest rates, which resulted in a 44% year-over-year surge in net interest income amounting to $21.8 billion. JPMorgan also raised its full-year guidance for net interest income in 2023 to $87 billion, $3 billion higher than the previous forecast made in May.

**Wells Fargo’s Positive Results**
Wells Fargo achieved $20.5 billion in revenue, surpassing analysts’ consensus forecast of $20.1 billion. The bank’s net income also witnessed a significant increase of 58% from $3.1 billion to $4.9 billion. CEO Charlie Scharf expressed satisfaction with the results and acknowledged the company’s strong position and potential for further improvement in customer service. However, similar to JPMorgan’s CEO Jamie Dimon, Scharf emphasized the uncertainty surrounding the US economy, which he expects to continue slowing down.

**Citigroup’s Surprising Performance**
Citigroup’s performance in the second quarter exceeded expectations, with revenues reaching $19.4 billion and earnings per share at $1.33, surpassing consensus estimates of $19.3 billion and $1.30, respectively. The bank’s net interest income experienced an 18% year-over-year increase due to higher interest payments from borrowers. This positive outcome helped offset a 13% decline in Markets division revenues and a 24% drop in investment banking fees, surprising Wall Street.

**Challenges Ahead for Big Banks**
Although big banks have achieved impressive earnings in the second quarter, they face a major challenge moving forward. Rising interest rates have led to increased interest payments from borrowers, boosting net interest income in the short term. However, to remain competitive, banks will eventually have to offer higher interest rates to depositors, impacting their net interest income. Currently, the national average savings accounts yield stands at just 0.53%, prompting consumers to seek higher-yield savings options such as certificates of deposit (CDs) or U.S. Treasuries, which yield nearly 5.5%. Consequently, JPMorgan’s CFO Jeremy Barnum cautioned that net interest income figures will likely decrease in the future as competition for deposits intensifies.

**Impact of Competition for Deposits**
Charles Peabody, an analyst from Portales Partners, sought further clarification regarding the impact of deposit competition during JPMorgan’s earnings call. He highlighted that the bank has a medium-term forecast for net interest income that is approximately $12 billion lower than their projected figure for 2023. Barnum acknowledged the substantial impact of even small changes in deposit interest rates when dealing with trillions of dollars of deposits. Shifting from a near-zero interest rate savings account to a 4% interest rate CD, for example, significantly affects a bank’s margin. Barnum emphasized the significance of the bank’s reminder about future net interest income expectations.

**Ongoing Economic Risks**
Despite the positive earnings reports, Dimon acknowledged several salient risks that warrant attention. First, consumers are spending their pandemic-era savings, potentially impacting economic stability. Second, core inflation remains stubbornly high, despite excluding volatile food and energy prices. Third, the ongoing conflict in Ukraine continues to weigh on the global economy. Finally, the Federal Reserve’s rapid reduction of its balance sheet, known as quantitative tightening, may have unforeseen consequences. Dimon characterized these risks as substantial and somewhat unprecedented, but he remains confident in the overall resilience of consumers and businesses.

**Hope for the Future**
While the risks are significant, Dimon urged individuals to remain optimistic and emphasized the strength of consumer balance sheets. He acknowledged that consumer spending has slowed but maintains that job growth remains robust. Although the outcome of economic challenges is uncertain, Dimon encouraged people to remain hopeful and strive for the best possible outcome.