Wall Street's major banks have fired the first shot of the earnings season, with strong performance. Has the soft landing of the U.S. economy been achieved?

The U.S. earnings season for stocks kicked off on Friday, with JPMorgan Chase and Wells Fargo, two major Wall Street banks, leading the way by reporting earnings that exceeded analysts' expectations. Analysts believe that the strong earnings from major banks may indicate that the U.S. economy has achieved a so-called "soft landing." Analysts also point out that financial stocks tend to perform well during rate-cut cycles and soft landings.

JPMorgan Chase and Wells Fargo: Increased Consumer Spending, Soft Landing Possibly Achieved

JPMorgan Chase stated on Friday that the U.S. economy remains strong for consumers and large companies, indicating that the Federal Reserve may have achieved the widely discussed "soft landing," maintaining healthy economic growth while lowering inflation.

JPMorgan Chase's earnings report showed that despite the Fed's rate cut in September, the bank's net interest income in the third quarter continued to exceed expectations, leading to an upward revision of its full-year revenue outlook. Executives stated that consumers continue to spend, and large corporations remain confident, reflecting the economic state that the Fed has been aiming for.

"These results are consistent with a soft landing," said Chief Financial Officer Jeremy Barnum during a conference call. "It aligns quite well with this Goldilocks economic condition."

Analysts believe that the recent rate cuts by the Fed will take time to have an impact on the banking system, with most analysts expecting a decline in banks' interest income. However, JPMorgan Chase's performance on Friday exceeded expectations.

Nevertheless, the situation is not entirely optimistic. For example, deposit balances have decreased, and JPMorgan Chase expects an increase in loan losses in the credit card division, indicating that some consumers are facing financial pressures. JPMorgan Chase's profit declined by 2% to $12.9 billion, but due to an increase in interest income, the results were better than expected. This decline was mainly due to the increase in credit card loan losses. Revenue grew by 7% to $42.6 billion.

Overall, JPMorgan Chase's customers continue to use credit cards for spending, and users' credit card balances are increasing. Despite the expected rise in credit card loan losses, executives stated that there is not much cause for concern.

"Consumer conditions are good and remain relatively strong," Barnum said.

Wells Fargo Chief Financial Officer Mike Santomassimo also stated on Friday that consumer spending has slightly declined, low-income customers are facing difficulties, but the overall situation remains robust.

"Consumers with low income or wealth levels are still the most anxious and pressured group," he said.

Wells Fargo's earnings report showed a profit decline of 11% to $5.11 billion in the third quarter, attributed to an increase in the financing cost of customer deposits. The bank slightly lowered its forecast for full-year net interest income. However, its profit still exceeded expectations.

Analysts: Rate Cuts, Soft Landing, Strong Performance of Financial Stocks

Data shows that Wall Street is awakening from the prolonged slump caused by rising interest rates, although trading volumes have not yet reached the levels of 2021, when monetary policy easing drove a peak in a year of mergers and capital market activities.

However, the impressive performance of JPMorgan Chase and Wells Fargo, along with positive comments on consumer health, led to a 3.4% increase in the KBW Bank Index, reaching its highest point since April 2022 Wells Fargo led the index with a surge of up to 6.9%, reaching its highest level since July. At the same time, Bank of America, JP Morgan, Zions Bank, and Western Alliance Bank all saw increases of over 3.5%. Wells Fargo, Bank of America, and JP Morgan also ranked high on the S&P 500 index in terms of gains.

Apollo Global Management analyst Torsten Slok told the media on Friday that financial stocks tend to perform well when the Fed's rate-cutting cycle ends and a soft landing is achieved. Slok analyzed the total returns of various industries during two rate-cutting cycles that did not overlap with economic recessions, from July 1995 to January 1996 and from September 1998 to November 1998.

Moshe Orenbuch of TD Cowen stated that the performance of banks indicates "resilient credit card spending and strong growth in outstanding balances." He expects loan loss guidance for 2024 to be "lower than initially expected at the beginning of the year, as credit continues to normalize as expected."

Additionally, KBW analyst Jade Rahmani noted that signals from JP Morgan and Wells Fargo regarding the troubled commercial real estate (CRE) industry confirm his view that the CRE market is nearing a bottom, with "more positive signs beginning to emerge."

The evidence he cited includes both banks maintaining stable reserves for expected credit losses, an increase in JP Morgan's CRE banking revenue, a reduction in Wells Fargo's CRE net charge-offs (primarily in the office building sector), and growth in capital markets revenue.

Rahmani added that a stable credit trend may be a positive signal for Real Estate Investment Trusts (REITs) investing in commercial mortgage-backed securities, while Wells Fargo's CRE capital market growth is beneficial for CRE brokers