Friday is the commencement of the fourth quarter earnings season. Several bulge bracket financial firms will post results, and most will focus upon any increase in non-performing loans (NPL). Like last year’s recession forecast where over 85% of economists including the Federal Reserve had predicted a 2023 recession, many analysts also predicted an increase in NPLs, an increase that largely did not occur.
The predominate 2023 issue of bank portfolios was not of their loan portfolio but rather their investment portfolio which was partially mitigated by reclassifying their investment portfolio to be labeled as “held to maturity” versus “available for sale.” When classified as “held to maturity,” mark to market risk is no longer a factor.
Have NPAs increased? How much did loan loss reserves increase? Such increases have a direct impact upon profitability and in some cases capitalization.
The financial system is regarded as “well capitalized” thus suggesting the odds of any systemic issues are low.
As noted yesterday, Bloomberg wrote the consensus earnings estimate of sell side analysts is that S & P 500 earnings will reach historical levels. Bloomberg further writes these forecasts are too high, the inverse of years’ past when both companies and analysts alike under promised and over delivered.
An economic slowdown is regarded as the biggest risk to the bottom lines, an obvious statement.
Speaking of potential risks, Bloomberg writes oil is understating the risk of the Israel-Hamas war escalating into a wider conflict. The Middle East risk premium is almost zero, a direct contradiction to what is occurring. Blomberg writes “the markets see a zero chance of the conflict widening. “
This is in direct contradiction to a 40% chance of Lebanon becoming involved and 60% chance Syria or Iran will intervene in the Israeli-Hamas war by July or a 65% probability of the US attacking Yemen before February according to the Newswire.
Such escalation could lead to a disruption of energy flows.
Wow! Talk about complacency or focusing upon one event…demand destruction brought upon by a recession, a recession that could potentially impact overall S & P 500 profits which are slated “to reach historical levels.”
Commenting on yesterday’s activity, led by the mega caps, the NASDAQ rebounded about 2.0%. The Dow rose only 0.5% following the Boeing news. Treasury yields dipped nominally across the curve.
Last night the foreign markets were down. London was down 0.05%, Paris down 0.42% and Frankfurt down 0.43%. China was up 0.20%Japan up 1.56% and Hang Seng down 0.21%.
Dow and NASDAQ futures are down 0.30% and 0.60%, respectively on interest rate fears. Oil is up about 3%. The 10-year is off 11/32 to yield 4.04%.
