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HomeFinanceThe nation's biggest banks are gearing up for more consumer struggles ahead

The nation’s biggest banks are gearing up for more consumer struggles ahead

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JPMorgan Chase & Co. Chief Executive Jamie Dimon on Friday said the U.S. economy was basically doing OK, even if customers were spending “a little more slowly.”

But with rivals like Bank of America Corp., Goldman Sachs Group Inc. and American Express Co. set to report quarterly results this week, recession agita still prevails.

For evidence, look no further than JPMorgan’s
JPM,
+0.60%

own quarterly results. The bank’s second-quarter profit blew past expectations, but it set aside $2.9 billion during the second quarter to cover potentially bad loans, amid concerns that more consumers could run into more difficulty paying their bills on time as higher prices manage to stick at stores.

That figure was well up from $1.1 billion in the same quarter last year, although still far below the billions it stowed away when the pandemic first hit. Similarly, Wells Fargo & Co.
WFC,
-0.34%

on Friday set aside $1.7 billion for loan losses in this year’s second quarter, nearly triple what it was a year ago.

The figures underscore the anxiety over the second half of this year, when many economists expect the economy to tilt into a recession. However, for the 500 companies in the S&P 500 index, Wall Street analysts still expect profit growth.

Any downturn could be exacerbated by the pressure investors have put on companies, potentially via more layoffs and money-saving technology, to keep prices high and cut costs to replicate the abnormally large profit-margin gains they put up in 2021 and 2022. Businesses have indeed kept prices high, at least for many basic necessities, in an effort to cover their own higher costs and to pad profits.

When Bank of America
BAC,
-1.89%

reports this week, the results will narrow the lens on lending and spending in the U.S. Results from Morgan Stanley
MS,
-0.50%

and Goldman Sachs
GS,
-0.76%

will fill in the gaps on trading and deal-making. American Express
AXP,
-0.49%

will give a more detailed breakdown of what consumers are still spending their money on, after Delta Air Lines Inc.
DAL,
-2.35%

— which has a partnership with AmEx — said that travel demand remained “robust.”

Banks shoveled more money into their reserve stockpiles in 2020 to bulk up against the pandemic’s shutdown of the economy. A year later, they started releasing those funds as the economy reopened and recovered. FactSet expects the broader banking sector to plump up its cash cushion during this year’s second quarter to account for more late loan payments or potential defaults.

In a report on Friday, FactSet said the 15 banking-industry companies in the S&P 500 Index tracked by the firm were on pace to set aside $9.9 billion to cover losses from souring loans in the second quarter. That’s more than double the amount set aside a year ago. And if that $9.9 billion figure, based on actual and projected financial figures, ends up as the actual figure at the end of the quarter, it would mark the highest since the beginning of the pandemic and the third highest in five years, according to FactSet data.

“The U.S. economy continues to be resilient,” Dimon said in a statement on Friday. “Consumer balance sheets remain healthy, and consumers are spending, albeit a little more slowly. Labor markets have softened somewhat, but job growth remains strong.”

However, he noted difficulties in JPMorgan’s investment banking segment. And he said consumer savings were slowly eroding as inflation endures.

As the nation’s biggest bank, JPMorgan has flexed its financial muscle this year, swallowing up First Republic after that bank got into trouble. But as it consolidates power and influence, building thicker armor against shocks to the economy, its financial results might not always reflect the struggles of its smaller rivals, where difficulties are likely felt more acutely. Analysts at Raymond James said that while JPMorgan remained a “best in breed” bank, its outlook pointed to “heightened challenges for smaller banks.”

See also: Jamie Dimon says U.S. consumers are in ‘good shape.’ This evidence may prove otherwise.

This week in earnings

For the week ahead, 60 S&P 500 companies, including five from the Dow, will report quarterly results, according to FactSet. Two big oil companies, Halliburton Co.
HAL,
-2.28%

and Baker Hughes Co.,
BKR,
-0.95%

will report, as oil prices fall from levels seen last year. Results from two transportation giants — trucking company J.B. Hunt Transport Services
JBHT,
-0.42%

and railroad operator CSX Corp.
CSX,
-0.27%

— will also be a proxy for how much people are buying things and having them shipped. United Airlines Holdings Inc.
UAL,
-3.42%

and American Airlines Group
AAL,
-1.68%

will also report.

The call to put on your calendar

Netflix results: Hollywood shutdown, ‘slow-growth’ expectations. Hollywood’s writers — and now its actors — have gone on strike, and Netflix Inc. reports second-quarter results on Wednesday. The streaming platform will likely face questions over how much content it has left in the tank, as the strike upends studio-production schedules and leaves viewers with vast expanses of reruns. Still, Macquarie analyst Tim Nollen said that the production standstill “may ironically drive even more viewers to streaming services.”

The writers and actors argue that the studio industry — increasingly consolidated, increasingly publicly traded, increasingly oriented around a handful of film franchises — has profited immensely while skimping on things benefits and streaming residuals. But after a decade-long rise, and a recent shift in investor focus from subscriber growth to profit growth, Netflix has emerged as one of the biggest production powerhouses in the business. And after years of flooding customers with new films and shows, it’s trying to squeeze out sales via more boring ways: things like a password-sharing crackdown and ads.

Daniel Morgan, senior portfolio at Synovus Trust Co., said Netflix still faced a plenty of streaming competition amid “muted” subscriber growth. But Wedbush analyst Michael Pachter said investors should look at Netflix as a profitable, albeit more mature company.

“We think Netflix is well-positioned in this murky environment as streamers are shifting strategy, and should be valued as an immensely profitable, slow-growth company,” Pachter said in a research note on Friday.

“Even while the ad-supported tier is not yet directly accretive (we think it will be accretive over time), the ad-tier should continue to reduce churn and draw new subscribers to the service,” he continued.

The number to watch

Tesla sales. Electric-vehicle maker Tesla Inc. also reports second-quarter results on Wednesday. And like streaming, some analysts say the fervor for EVs has faded.

However, they also said that Tesla
TSLA,
+1.25%

had so far been immune from the malaise. And even though Elon Musk remains preoccupied with Twitter — which now faces competition from Meta Platforms Inc.’s
META,
-1.45%

Threads — Tesla’s second-quarter deliveries were far above expectations. Sales are expected to be big. And one analyst said that price cuts, which Tesla has used to capture more of the auto market in China, were likely “fairly minimal” during the second quarter. But some analysts wondered what the blowout delivery figures would mean for margins. And the industry, broadly, has increasingly tested the patience of profit-minded investors.

“We’ve now seen a market where demand is constrained, capital has been tighter, and there is less tolerance for EV related losses,” Barclays analysts said in a note last week, adding that there was a “step back from EV euphoria.”

Claudia Assis contributed reporting.

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