What Happened Last Week
- Markets Rebound: Cooling trade tensions and strong earnings helped the market recover most of the prior week’s losses.
- Credit Fears: The regional bank index suffered its worst one-day decline since Liberation Day as investors were reminded of March 2023.
- Solid Earnings: Despite the credit concerns, large and smaller banks turned in good reports, and credit loss provisions remain normal.
What We’re Watching This Week
- Earnings: Regional banks, a few major tech names, and some smaller AI-related companies will report.
- Eco Data: Despite the shutdown, the September CPI will be released this week. The lack of data recently may cause investors to overreact to the print.
- Global Politics: Focus will shift from the impasse in Washington to China this week as the Communist Party begins its annual planning meeting.
Investment Management Team Views
The S&P 500 rebounded from its China trade tension-induced selloff and notched its largest weekly gain since August, although the sentiment felt anything but bullish. After some strong reports from the major U.S. banks, credit concerns came to the forefront after Jamie Dimon, J.P. Morgan’s CEO, warned about the possibility that other bad loans would surface. Several regional banks disclosed exposure to faulty borrowers, and regional banks as a whole suffered their worst losses since Liberation Day. Credit provisions are the key metric to watch in assessing systemic credit health, and the read across large and smaller banks was positive. However, the market immediately went to its March 2023 playbook last week. Over half of the regional bank index, as well as two names that were at the center of concern, report earnings this week. We will continue to watch the space closely, but based on what we know now, last week’s selloff in regional banks looks overdone.
The bank and credit headlines overshadowed the positive developments on trade, the AI theme, and Fed policy last week. Both President Trump and China are ratcheting down trade tensions, and the meeting between Trump and Xi at the end of the month still looks set to happen. Investors also seem to be looking past the tit-for-tat trade jockeying with an eye towards a major U.S.-China deal as the dollar sold off and emerging markets outperformed last week. International AI players ASML and Taiwan Semiconductor released strong earnings reports that boosted optimism in the AI theme and led U.S. mega-cap tech to outperform. While the government shutdown continues to impact economic data releases, Fed Chair Powell spoke last week, and his slightly dovish bent cemented the market’s expectations of a Fed cut at the end of the month.
Looking ahead to this week, a broad swath of companies is set to report earnings. Netflix and Tesla will help set the tone for the rest of the Big Tech universe, while some of the smaller AI adjacent names – both tech companies and power generators – will add to investors’ views on the theme. A handful of consumer-facing names are set to round out the week, and with government retail sales data suspended, these reports may be more closely watched than they typically are. The off-cycle reporting of CPI on Friday may be noisier than usual, and, given the recent lack of data, could provoke a larger-than-usual market reaction.