Bank Earnings Give Stocks a Boost
A better-than-expected earnings report from Citigroup C +3.02% helped kick-start a rally in stocks, lifting market indexes nearly back to levels seen before last week’s swoon.
Many investors remain optimistic about the outlook for stocks broadly, amid improving U.S. economic data and an accommodative Federal Reserve policy. U.S. stocks have steadily pushed to records through the year. But with prices at lofty levels, investors are looking to second-quarter-earnings reports for validation of the record-setting rally.
The Dow Jones Industrial Average climbed 111.61 points, or 0.7%, to 17055.42. The blue-chip index pushed to a record in intraday trading but fell back before the day’s end.
The S&P 500 index tacked on 9.53 points, or 0.5%, to 1977.10.
With Monday’s rally, stocks have largely recovered losses posted last week, which followed news of financial woes at a Portuguese bank.
The S&P 500 index shed 0.9% last week, its biggest one-week drop since early April. The Dow fell 0.7%, its largest decline since early June.
Traders pointed to the news from Citigroup, whose earnings report showed trading revenue held up better than was forecast amid a broad slump in trading businesses across Wall Street. The bank also said it agreed to pay $7 billion to settle a probe by the U.S. government about the quality of mortgages it sold leading up to the financial crisis.
Shares of other big banks rallied amid hopes they might also post better results than analysts expected. On Tuesday, J.P. Morgan Chase JPM +0.88% and Goldman Sachs Group GS +1.33% are to report second-quarter earnings, with analysts surveyed by FactSet projecting profit declines.
“The Citigroup earnings were enough of a tailwind to push the boat forward,” said Michael Antonelli, equity-sales trader at brokerage Robert W. Baird & Co.
Financial shares have struggled of late, with big banks hit by litigation costs, a downturn in once-lucrative trading businesses and a weak mortgage market. The financial sector index is up 4.4% this year, trailing the 7% gain in the broader S&P 500.
For the quarter, Citigroup reported a profit of $181 million, or three cents a share, down 96% from the profit of $4.18 billion for the year-earlier quarter. Stripping out the pretax charge of $3.8 billion tied to the Justice Department deal and other adjustments, per-share earnings of $1.24 topped the $1.05-a-share expected by analysts, which also excludes one-time charges.
Citigroup shares rose $1.42, or 3%, to $48.42. Despite Monday’s rally, shares of Citigroup are down 7.1% this year.
J.P. Morgan Chase gained 49 cents, or 0.9%, to 56.29, while Goldman Sachs added 2.20, or 1.3%, to 167. Morgan Stanley MS +1.27% added 40 cents, or 1.3%, to 31.81.
Financial-company fortunes aren’t expected to improve soon. Analysts reckoned second-quarter earnings for financial stocks in the S&P 500 will decline 4.2% from the year-earlier period, according to FactSet, after a 2.6% drop in earnings in the first three months of the year. Second-quarter earnings for the broader S&P 500 are expected to rise 4.5%.
Citigroup’s operating performance gave investors some comfort, as Chief Executive Michael Corbat continues to deal with a range of issues at the bank, including the settlement, allegations of accounting fraud at its Mexico unit and the Federal Reserve rejecting the bank’s dividend and share-buyback plan in March.
The company’s performance in the second quarter, however, wasn’t as bad as feared. Citigroup reported a 15% drop in its second-quarter trading revenue, better than the 20%-to-25% drop the bank warned about in May. Activity picked up in June and gave the bank’s executives some optimism about the second half.
Keeping expenses down was another bright spot for Citigroup, as the bank cut operating expenses by roughly 3% during the second quarter from both the year-ago quarter and the first quarter.
“The settlement that came out today closes a chapter and alleviates some uncertainty” for the bank, said Reed Choate, portfolio manager at Neville, Rodie & Shaw Inc., a New York firm that manages $1.4 billion.
Mr. Choate said he owns a basket of financial stocks, but he prefers shares of smaller firms and regional banks that don’t face the same trading pressures large investment banks do. “I think some of the big banks are going to be tough to own through the earnings season,” he said.
The Nasdaq NDAQ +2.89% Composite Index added 24.93 points, or 0.6%, to 4440.42.
European stocks were recovering following last week’s turbulence. The Stoxx Europe 600 index rose 0.9%, clawing back part of last week’s losses.
The dollar eased against the euro but gained on the yen. The yield on the 10-year Treasury note edged up to 2.548%.
In commodity markets, gold futures tumbled 2.3% to $1,306.30 an ounce, while crude-oil futures tacked on eight cents to $100.91 a barrel.
In other corporate news, U.S. drug company AbbVie ABBV -0.20% is nearing a deal to buy Dublin-based Shire for more than £31 billion ($53 billion). Shire said Monday it had received an altered offer of £53.20 a share, marking the fifth takeover attempt by AbbVie. Shares of AbbVie fell 11 cents, or 0.2%, to 54.85. U.S.-based shares of Shire rose 5.21, or 2.1%, to 254.27.
Shares of Riverbed Technology RVBD -8.60% fell 1.75, or 8.6%, to 18.60 after the information-technology company lowered its second-quarter revenue outlook, as sales fell short of company targets.
Source: wsj
