"Asset Pricing Anchor" wreaks havoc. Will the Wall Street giants leading the earnings season become the saviors of the U.S. stock market?

According to the Zhitong Finance APP, the new round of the U.S. stock earnings season officially kicks off this week, with financial giants on Wall Street such as Goldman Sachs, Morgan Stanley, and JPMorgan Chase taking the lead. The performance of these financial giants and their management's outlook for future earnings will have a significant impact on the U.S. stock market and even the global stock market, especially at a time when the "anchor of global asset pricing" is exerting pressure on stocks and other risk assets. The market is looking forward to the Wall Street giants starting the new earnings season with better-than-expected growth performance.

As the 10-year U.S. Treasury yield, known as the "anchor of global asset pricing," soared to a new high since October 2023, the U.S. stock market has recently entered a downward adjustment phase under the continuous upward pressure of Treasury yields. Recently, there has been a comprehensive negative correlation between Treasury yields and stocks, meaning that when the 10-year Treasury yield rises, the three major U.S. stock indices fall sharply. Therefore, any positive economic news that can push up Treasury yields—such as a stronger-than-expected labor market, CPI, and retail sales—will be negative for stocks and other risk assets.

From a theoretical perspective, the 10-year Treasury yield is equivalent to the risk-free rate indicator r in the important valuation model of the stock market—DCF valuation model. If there are no significant changes in other indicators (especially the cash flow expectations on the numerator side), a higher denominator level or sustained operation at historical highs will undoubtedly lead to a collapse in the valuations of tech stocks, high-yield corporate bonds, and cryptocurrencies, which are already at historical high valuations.

However, if the cash flow expectations on the numerator side can continue to exceed expectations, it can significantly raise the market's pricing range for stocks and other risk assets. The cash flow expectations on the numerator side are largely based on the performance of earnings during the earnings season, so upward revisions in corporate profits are crucial for the pricing trends of stocks and other risk assets. After the earnings season kicks off, when the constituent companies of the S&P 500 gradually announce their Q4 actual performance and future profit guidance, data that meets or even exceeds the general expectations of strategists is expected to significantly boost investor sentiment in the U.S. stock market.

Bank of America strategists pointed out that options trading pricing indicates that after earnings announcements, individual stocks in the S&P 500 could experience an average upward and downward fluctuation of up to 4.7%, setting a record for the largest fluctuation on earnings days in history. This expected fluctuation reflects the current market environment's uncertainty, especially regarding inflation uncertainty and the prospect of further interest rate cuts by the Federal Reserve, which has made investors uneasy. Therefore, hedge fund traders and investors are beginning to turn their attention to the new earnings season, hoping to find some comfort, at least for American companies, that everything is still fine.

The fourth-quarter performance of JPMorgan Chase (JPM.US), Citigroup (C.US), Wells Fargo (WFC.US), Bank of America (BAC.US), BlackRock (BLK.US), Goldman Sachs (GS.US), Morgan Stanley (MS.US), and TSMC (TSM.US), as well as management's outlook for the future, will be the focus of this week's earnings disclosures.

Wall Street Financial Giants Kick Off the New Earnings Season

JPMorgan Chase will announce its earnings report before the market opens on Wednesday Eastern Time, officially kicking off the upcoming earnings season. This is not only a critical test for the U.S. stock market, which has rebounded after two years of intense growth, but also a focal point of market attention. According to the latest data from Bloomberg Industry Research, analysts generally expect the earnings of S&P 500 constituent companies to grow by 7.5% in the fourth quarter, marking the second-highest pre-season forecast in the past three years and setting a high benchmark expectation for companies to achieve better-than-expected performance.

"The fourth quarter earnings season may be one of the most important U.S. earnings seasons we have seen in a long time," said Larry Adam, Chief Investment Officer at Raymond James. With the Federal Reserve unlikely to cut interest rates as quickly as investors hoped last year, instead shifting to a hawkish stance of "maintaining high rates for the long term," corporate performance becomes even more crucial for boosting market bullish sentiment, as performance metrics have historically been one of the biggest drivers of stock market increases.

Analysts generally expect a slight decline in overall earnings per share for the U.S. banking sector in the fourth quarter compared to the strong profits of the third quarter, but still anticipate significant year-on-year growth, despite the Federal Reserve having cut rates by 100 basis points in the past quarter, as the U.S. benchmark interest rate remains relatively high.

The ongoing high interest rates in the U.S., along with the end of the inverted yield curve for U.S. Treasury bonds, are likely to drive commercial banks' net interest income growth in the fourth quarter and in the coming quarters, while strong capital market activity may boost non-interest income through healthy fee-based revenues, suggesting a continued recovery in investment banking.

Analysts expect fourth-quarter performance will not set new highs, with a projected quarter-on-quarter decline. However, over the past six months, consensus expectations for most currency center/financial center type banks have improved. For example, JPMorgan Chase's consensus earnings per share expectation for the fourth quarter is $4.04, which has been revised up by 3.8% in the past month and by 7.7% in the past six months. Analysts have significantly increased their optimism regarding Morgan Stanley's fourth-quarter earnings per share, mainly anticipating that the U.S. stock market will surge due to Trump's victory in November-December, leading to growth in trading business, and that investment banking will benefit from the recovery of global stock market IPOs, with consensus expectations revised up by 5.0% in the past month and nearly 14% in the past six months.

Kenneth Leon, an analyst from CFRA, expects that the strong U.S. economy will support loan growth, thereby achieving "moderate growth" in net interest income, although this growth will be offset by lower-rate business segments. Meanwhile, Leon anticipates a rebound in capital market IPO business, growth in funds and custodial services, and significant boosts to non-net interest income from asset/wealth management businesses.

Brian Moynihan, Chairman and CEO of Bank of America, recently stated that the bank's loan growth rate exceeds the industry average, and deposits are increasing while high-cost deposits are gradually decreasing. Analysts expect the bank's net interest income for the fourth quarter to reach $14.3 billion, compared to $14.1 billion in the third quarter Analyst Betsy Graseck from Morgan Stanley expects that, benefiting from the trading boom driven by the U.S. stock market hitting new highs since November, the revenue scale related to capital markets for Wall Street financial giants will see strong growth in the fourth quarter, particularly in trading and equity capital markets, exceeding expectations. She believes that JPMorgan Chase and Citigroup are the top stocks in the U.S. stock market rebound. In her fourth-quarter earnings preview report, the analyst noted, "Despite bank executives unexpectedly exceeding expectations with strong guidance for fourth-quarter trading business at the industry conference in early December, as the typical seasonal slowdown in December did not occur, we expect trading revenue could be even higher."

Graseck from Morgan Stanley also stated that the strong performance of capital markets, accompanied by stable or even declining compensation ratios and lower non-compensation expense ratios, will significantly enhance operating leverage.

Leon from CFRA expects that Goldman Sachs and Morgan Stanley will dominate the investment banking industry with a higher concentration of capital market activities. Meanwhile, Bank of America and Citigroup are more inclined towards traditional banking operations. JPMorgan Chase maintains a more balanced business distribution.

UBS analyst Erika Najarian pointed out several favorable trends for financial giants like banks—capital market revival, expectations of deregulation under Trump, rising yields, good credit quality, and expectations nearing the upper limit of the absolute range. In a recent report, she wrote, "These themes suggest that earnings per share may be positively revised, with financial centers likely to be most affected." Her top picks among large banks include Bank of America, Wells Fargo, PNC Financial Services (PNC.US), and Huntington Bancshares (HBAN.US).

Analyst Vivek Juneja from JPMorgan Chase expects that strong investment banking business, particularly in equity underwriting and leveraged loan syndications, will drive fourth-quarter profits. The two strong areas in the fourth quarter are expectations for loans to non-bank financial institutions and a steepening U.S. Treasury yield curve, which impact credit and net interest margins. When the yield curve steepens, the spread between bank lending rates widens, allowing them to charge higher rates on loans while paying lower rates on deposits or short-term borrowings.

The inversion of the 2/5-year, 2/10-year, and 2/30-year U.S. Treasury yields, which has repeatedly dominated financial market headlines since early 2022, is expected to end in 2024. With the "Trump 2.0 era" beginning in 2025, the massive scale of debt and the borrowing scale under the "MAGA fiscal framework" of the Trump 2.0 era may become even larger, potentially steepening the U.S. Treasury yield curve further.

Among banks of the currency center/financial center type, JPMorgan Chase is more optimistic about Citigroup, expecting the group to benefit from the strong growth of its investment banking business; its trading revenue growth year-on-year will be driven by a more lenient comparison benchmark, making it much easier to exceed expectations compared to competitors.

Zhunai wrote that Bank of America will also benefit from capital market-related businesses, but some cost pressures arising from the recent Bank Secrecy Act agreement will limit its earnings.

Jonathan Wei, head of the Cash Flow Club investment team, believes that JPMorgan Chase, the largest commercial bank by asset size in the U.S., is likely to achieve better-than-expected earnings in the fourth quarter. Growth drivers include higher-tier investment banking and asset management fees, net interest income, and potentially lower credit loss reserves given the strong job market and focus on high-net-worth clients.

Morgan Stanley expects that liability-sensitive banking giants will benefit from the steepening of the U.S. Treasury yield curve and points out that trust-type banks such as State Street Corporation (STT.US) and large regional banks like U.S. Bancorp (USB.US) are aligning with this trend.

Under Trump's Push, Wall Street Giants May Release Optimistic Earnings Expectations

Trump is set to return to the White House on January 20 to begin his second term, promising to reduce federal regulation on large companies, especially financial giants, and pledging further tax cuts, increased oil production, and strict immigration policies. These indicate that U.S. economic growth and inflation are expected to strengthen, which is seen as a positive factor for the stock market, with leaders in industries such as finance, large technology, defense, and fossil fuels likely to benefit significantly.

As a result, analysts generally expect that under Trump's deregulation and tax cut policies, the management teams of Wall Street financial giants like JPMorgan Chase, Goldman Sachs, and Bank of America will release optimistic earnings expectations in the latest earnings conference call, further driving molecular expansion.

"It is clear that this administration will be more friendly to Wall Street and financial trading activities. This enthusiasm has precedent. For a long time, financial stocks have been viewed as the preferred industry during Republican administrations, mainly due to the expectation of deregulation and a more favorable environment for major financial giants and large-scale mergers and acquisitions," stated JPMorgan Chase's U.S. investment strategy team in a report. JPMorgan Chase indicated that its investment team is looking for more financial and asset management industry stock targets for its 2025 portfolio