Behind the record high of US stocks led by Wall Street financial giants: "Soft Landing" becomes more apparent

According to the financial news app Zhitong Finance, the two largest commercial banks in the United States stated on Friday that despite signs indicating an intensifying inflation rate in recent years and the heavy pressure of high interest rates causing some low-income Americans to struggle, overall American consumers maintained a strong consumption momentum in the third quarter. Financial data shows that Wall Street financial giants JPMorgan Chase (JPM.US) and Wells Fargo (WFC.US) demonstrated strong overall profitability. Although JPMorgan Chase increased its provisions for bad loans, optimistic comments from the bank's executives further alleviated investors' concerns about the rising cost of borrowing pressure on consumers and significantly eased worries about the U.S. economy heading towards the edge of a recession.

In terms of stock prices, the market capitalization giant JPMorgan Chase, with a value of $600 billion, saw its stock price rise by over 5% during U.S. trading hours, closing with a more than 4% increase; Wells Fargo's stock price rose nearly 6% at one point during trading hours and closed with a 5.6% increase. Undoubtedly, these two major high-market-cap financial giants drove the U.S. stock market benchmark - the S&P 500 index - to reach a historic high on Friday, marking the 45th historical high for the index this year. The optimistic information about a "soft landing" revealed by them also filled investors with anticipation for the upcoming new round of U.S. stock earnings season.

"Overall, we believe that the consumer spending pattern is very stable," stated Jeremy Barnum, Chief Financial Officer of JPMorgan Chase. JPMorgan Chase is the largest commercial bank in the United States and one of the leaders of the U.S. economy. He added that consumer spending has normalized from the rebound after the COVID-19 pandemic, with Americans initially splurging mainly on travel and dining out, but now consumer spending is more balanced.

Occasional weak data in the U.S. non-farm employment market has raised concerns among investors that the Federal Reserve's aggressive rate hikes to curb inflation may lead the U.S. into an economic recession or a "hard landing." However, Barnum stated in an analyst interview that the consumer spending pattern is "consistent with a solid consumer base, in line with a strong labor market and the central optimistic view of the current economic 'non-landing' scenario."

Wells Fargo's Chief Financial Officer Michael Santomassimo told reporters that although the scale of spending on credit cards and debit cards has decreased compared to earlier this year, it remains "quite stable."

The bank's financial report stated that based on debit card purchases and overall transaction volume, there was a nearly 2% year-on-year increase, while the transaction volume displayed by credit card sales terminals increased by approximately 10% year-on-year. JPMorgan Chase's latest debit card and credit card spending also increased by 6% year-on-year.

The other two Wall Street financial giants - Bank of America (BAC.US) and Citigroup (C.US) - also major commercial banks in the United States, will release their performance reports next week, and retail sales data will also be announced next week. At that time, the market will have a more comprehensive understanding of a crucial data point for the U.S. economy - the scale of consumer spending.

Some institutional investors expressed that the confidence revealed in the financial reports of the Wall Street financial giants on Friday is a positive and significant signal for the U.S. stock market and the entire U.S. economy In terms of economic data, the latest release of non-farm payroll data exceeding expectations, a lower-than-expected unemployment rate, and an upward revision of long-term GDP growth rate, combined with the initial jobless claims numbers in recent weeks basically meeting expectations, along with the steady decline in US inflation, and the financial giants on Wall Street announcing robust performance in consumer spending, these data outline a scenario that perfectly fits the "soft landing" scenario envisioned by Federal Reserve officials for the US economy. Therefore, some economists are shouting that the US economy has successfully achieved a "soft landing" or is very close to it.

After the pandemic caused a sudden downturn in the US economy leading to a brief economic recession, even after experiencing aggressive interest rate hikes by the Federal Reserve following high inflation, pushing the US benchmark interest rate to the highest level in over 20 years at 5.25%-5.5%, the US economy rebounded quite strongly. The comprehensive annual update from the US Bureau of Economic Analysis shows that from the second quarter of 2020 to the end of 2023, the average inflation-adjusted annual GDP growth rate in the US is 5.5%. Compared to the previously announced 5.1% growth rate, the revised number is significantly more optimistic.

As for the final annualized quarterly real GDP growth rate for the US in the second quarter, it maintains the optimistic growth rate of 3% announced earlier, with the rebound from the previous quarter mainly reflecting accelerated growth in US consumer spending, inventory investment, and business spending, indicating that the US economy output in Q2 still achieved strong growth. In the first quarter of this year, the US government revised the US GDP growth rate from the previously reported 1.4% to the latest final value of 1.6%. The strong economic growth data in Q1 and Q2, combined with the Federal Reserve starting a rate cut cycle with a 50 basis point cut, significantly boosted investors' confidence in the US economy successfully achieving a "soft landing."

"In my view, JPMorgan Chase and Wells Fargo have a very healthy interpretation of consumer spending. Consumer spending seems to be more normalized, which is very healthy for the overall US economy," said Dave Wagner, stock director at Aptus Capital Advisors, holding large bank stocks.

However, Santomassimo, CFO of Wells Fargo, warned that the cumulative impact of long-term inflation rising in the US is dragging down the income-based consumer group, and the bank is observing whether this pattern will spread to high-income groups and high net worth groups not primarily driven by wages for consumption.

On Friday, a survey from the University of Michigan showed a slight decline in US consumer sentiment in October due to continued dissatisfaction with high prices.

"When you look at the overall average level, it looks good, but I think it is more distorted by high-income, high net worth consumer groups," said Paul Nolte, senior wealth advisor and market strategist at Murphy & Sylvest in Illinois He added, "It must be acknowledged that the situation is somewhat grim for those with lower incomes. We see an increase in overdue payments and car loan defaults. We see a decrease in deposit sizes, while credit card balances continue to rise."

Both JPMorgan Chase and Wells Fargo, the two major commercial banks, have set aside huge amounts of cash to offset potential bad debt growth. JPMorgan Chase allocated $3.11 billion, a significant increase from $1.38 billion allocated a year ago, mainly due to potential credit card loan losses. Meanwhile, Wells Fargo set aside $1.07 billion, slightly lower than the $1.2 billion set aside in the same period last year, although the bank noted in its financial report that it has increased its reserves for credit card loans as balances trend upwards.

The Philadelphia Fed stated on Wednesday in Eastern Time that earlier this year, concerns were raised about the high levels of credit card delinquencies exceeding ten-year highs, indicating that Americans are becoming overly stressed due to inflation and high interest rates. However, this situation began to show significant improvement starting in the second quarter.

On a positive note, the Philadelphia Fed mentioned that signs of distress in short-term borrowing lasting a month or longer saw their largest decline in three years, although it is still too early to declare a turning point in overall U.S. credit performance.

In a report on Thursday, Barclays' analysis team stated that they expect "the scale of credit card loan losses for U.S. consumers to continue the normalization process, but the pace may be slower than in the previous months."

"We believe the outlook for a 'soft landing' in the U.S. economy is becoming increasingly clear, but it may be premature to conclude that the unexpected 50-basis-point rate cut by the Federal Reserve in September has completely stabilized the labor market. We believe it is more likely that the Fed's next rate cut will follow the normal pace of a 25-basis-point cut in November." Bloomberg Economics economists Anna Wong, Stuart Paul, Eliza Winger, and Estelle Ou expressed