Good morning investors. Today we’re covering the first day of a high-profile bank earnings season, as well as Meta layoffs and December CPI. First time reading? Join over 190,000 self-directed investors and sign up here.

Banking on profits

Wall Street biggest banks are no strangers to good news and big money, yet the combination of falling rates, a loosening regulatory outlook, and deal-making optimism makes this earnings season particularly rosy. 

JPMorgan, Goldman Sachs, Wells Fargo, and Citi kick off with quarterly reports Wednesday, with Bank of America and Morgan Stanley close behind on Thursday. 

Each of those names’ stocks are coming off a banner stretch that’s steadily improved with Donald Trump’s election and rising hopes of an economic soft landing. 

A Trump-fueled boom in deal-making and trading to close out 2024 should yield hefty windfalls for Wall Street’s biggest names.

The six largest firms by assets — JPMorgan, Goldman Sachs, Morgan Stanley, Bank of America, Citi, Wells Fargo — are together expected to report $31 billion in profits for the final three months of 2024, Bloomberg data shows.

Investment banking fees, meanwhile, are forecast to have grown in the high double-digits across the board. Analysts expect JPMorgan, for instance, to report 45% higher fees in the fourth quarter compared to the same period in 2023.

Among the S&P 500’s eleven sectors, financials are expected to report the highest year over year earnings growth at nearly 40%, according to FactSet.

Big banks, big returns

Valuations for these stocks, in turn, now hover at their highest level in years.

KBW, an index that tracks a basket of bank stocks, has climbed more than 38% over the last 12 months, squarely above the S&P 500’s roughly 23% return.

Indeed, at least among Bank of America clients, financial stocks in recent weeks have seen their biggest inflows since March 2023.  

All of the above has left some investors concerned that expectations have ballooned too high. 

Cetera Investment Management CIO Gene Goldman, for one, told me that weak loan growth, pressure on net interest income, and the impact of high interest rates on deposit costs and loan demand remain top of mind.  

“Beyond this earnings season, despite a potentially more business-friendly environment under the Trump administration, banks and the financial services sector as a whole are likely to face pressure as the sector faces tough year-over-year earnings comparisons,” Goldman said, noting that choppy trading could follow in the coming weeks.

It’s worth noting, too, that the deadly Los Angeles fires, introduce an unanticipated detail that could show up for banks.

Chris Marinac, director of research for wealth management firm Janney Montgomery Scott, told me the blaze isn’t likely to derail the most recent quarter but it’s worth watching for earnings to come. 

“Typically, banks have insured properties when they underwrite,” Marinac said. “It's a standard requirement. It's rare that a bank lends money on something that doesn't carry insurance. There's a risk of insurance dispute and unknown risk of loss.”

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Elsewhere:

📊 Traders are focused on inflation. Stocks closed mixed after the December PPI report showed prices rose less than expected in December, climbing 3.3% year-over-year. Wednesday at 8:30 a.m. ET will bring the closely-watched December CPI data, which is seen accelerating from 2.7% to 2.9% annually. (Yahoo Finance)

🚨 The SEC has sued Elon Musk over securities violation in Federal Court. The regulator claimed Musk did not disclose a major purchase of Twitter shares ahead of his takeover of the platform, which has since been renamed X. Musk’s lawyer said the action is “an admission” that the SEC can’t bring an “actual case” because nothing wrong has been done. (Reuters)

📈 US debt won’t stop growing. The government’s budget deficit in December climbed again, and it’s now 40% higher than it was a year ago, according to a new report. It now hovers at $710.9 billion, some $200 billion more than the same period in the prior year. (CNBC)

🛑 Big Tech takes a hiring pause. On Tuesday, Meta announced it was laying off 5% of its staff based on performance, and the same afternoon Microsoft announced it would pause hiring in the US as part of a cost-cutting initiative. One week earlier, Microsoft also said it would layoff less than one percent of its company. (CNBC)

Traders see 91% odds that December inflation comes in hotter than 2.7%, according to Kalshi, the biggest US prediction market:

Rapid-fire:

• Edison International’s decision to leave its LA power lines operating during a historic windstorm last week is under investigation (Bloomberg)

• Top BlackRock executive Mark Wiedman, who was thought to be Larry Fink’s sucessor, is resigning (CNBC)

• Wall Street bankers are growing more optimistic about mergers and acquisitions in 2025 (Reuters)

• The global liquidity level is the most important data point to watch for investors (Pomp Letter)

• Defense Secretary nominee Pete Hegseth is on track for confirmation after a contested hearing Tuesday (WSJ)

• Intel plans to spin off its venture capital arm (Reuters)

Last thing: