🎙️ Earnings Season Returns!

It’s that time of year again: Welcome back, folks, to the 2023 Earnings Season — second-quarter edition 👇🏻

As always, the big banks kicked things off today, with BlackRock and UnitedHealth joining in too.

💭 Expect to hear less about inflation and more about “artificial intelligence” in corporate calls this time around. Nobody wants to look like the company not taking AI seriously, plus it’s an easy way to score bonus points with investors.

We’ll be covering it all, so you don’t have to.

— Shawn & Matthew

Here’s the rundown:

Today, we'll discuss the three biggest stories in markets:

• Big banks kick off earnings season

• A $785 billion wall of debt looms over companies

• How payments in the U.S. are modernizing

All this, and more, in just 5 minutes to read.

CHART OF THE DAY

IN THE NEWS

🥂 JPMorgan, BlackRock Kick Off Earnings in Style (WSJ)

Earnings season is back. Let the talk of “strong balance sheets” and “challenging macroeconomic backdrops” commence.

Is the banking crisis in the rearview? The sector has calmed drastically since March. Still, interest rates have stayed higher, meaning banks must pay more to depositors. Their securities holdings have become much less valuable than they once were.

Big banks: JPMorgan Chase said its second-quarter profit jumped 67%, thanks partly to a lift from acquiring the failed First Republic Bank in May.

• JPMorgan’s First Republic rescue deal bolstered its consumer and commercial banks with new clients, branches, and deposits, leading to about $2.7 billion in gains, thanks largely to billions of dollars in deposits from well-to-do clients. JPMorgan’s profit rose to $14.47 billion, or $4.75 a share, up from $8.65 billion, or $2.76 a share, a year ago.

BlackRock, meanwhile, also reported a jump in profits in the second quarter as rising inflows pushed its assets under management (AUM) to $9.4 trillion. Its cash management products rose as investors flocked to capitalize on higher interest rates.

• “Clients want more from BlackRock, not less,” CEO Larry Fink said. Added one analyst: “They have built a better mousetrap in terms of having better technology and options across all asset classes. Most asset managers are shrinking and BlackRock has been growing.”

Elsewhere: It wasn’t a great quarter for Citigroup, whose profit fell 36%, but profit and revenue did surpass expectations.

Why it matters

It’s almost always insightful (and interesting) to hear from executives during earnings season. What are they noticing? What do their comments say about the broader market and economy?

• Here’s Citi CEO Jane Fraser: “Markets revenues were down from a strong second quarter last year, as clients stood on the sidelines starting in April while the U.S. debt limit played out. In banking, the long-awaited rebound in Investment Banking has yet to materialize, making for a disappointing quarter.”

For BlackRock, a better-than-expected market rebound in the year's first half helped the firm, known for its low-cost passive investment products, such as exchange-traded funds. BlackRock also benefited from the bank turmoil that prompted Americans to move money from deposit accounts to money-market funds.

And as for JPMorgan, it’s clear the biggest bank benefited from its size amid the panic in March. Customers pulled deposits from smaller banks and flocked to its perceived safety. JPMorgan racked up about $50 billion in deposits in March alone.

• And, as interest rates have risen, JPMorgan has charged more on loans and increased the payouts for deposits more modestly – creating record revenues.
  

• Said JPMorgan’s Jamie Dimon: “The U.S. economy continues to be resilient,” Consumer balance sheets remain healthy, and consumers are spending, albeit a little more slowly. Labor markets have softened somewhat, but job growth remains strong.”

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😳 Companies Are Running Out of Cheap Financing (Bloomberg)

Corporate debt. Not a sexy topic. But a “$785 billion wall” of looming “junk-bond” debt, as Bloomberg reports, is more interesting. Let’s discuss.

Flashback: The year is 2020, interest rates are near 0%, government stimulus is flooding the economy (meaning people have more to spend on products), and the stock market is booming — life’s good for corporate execs.

• So you follow the advice of your MBA-grad advisors, take out a bunch of debt that’s basically “free” (very little interest), and pour that into your business.
  

• With the Federal Reserve even promising to backstop corporate debt markets through so-called quantitative easing, conditions were unprecedentedly favorable for borrowing lots of money.

Three years later, much of that cheap debt is coming due soon, and you face a basic tradeoff: Pay back those big debt bills now or borrow more money to pay back the debt that’s due and kick the can down the road.

• The problem with the latter is that interest rates are much higher now, meaning you might be swapping out debt with almost no interest for much costlier debt.
  

• In fact, “the extra interest companies have to pay when replacing debt” stands at “more than five times the average since 2018.”

The math: Bloomberg calculates that these companies, on average, have 4.7 years to put new financing in place, the “least amount of time ever.” As rates first rose, many companies just sat on the sidelines, but now 40% of that $785 billion wall of debt must be refinanced between 2024 and 2026.

Why it matters

As a result, the credit rating firm Moody’s projects that global default rates for “high-yield” corporate borrowers, firms considered less financially stable, will jump from 3.5% this year to 5% next year.

But Gurpreet Gill, a macro strategist at Goldman Sachs, is less worried. She argues that the pandemic knocked out many of the shakiest companies already, and by the time most companies have to refinance in 2025, interest rates will likely be coming down or have already fallen.

• If true, companies could largely sidestep the Fed’s rate-hiking campaign in 2022 & 2023.
  

• Doing so by 1) borrowing en masse during the pandemic and then 2) refinancing a year or so from now when the Fed may be cutting rates in response to an economic slowdown.

MORE HEADLINES

🛍️ This year’s Amazon Prime Day was the biggest in company history

😵‍💫 It feels like 2021 again as crypto altcoins soar

💵 Biden administration forgives $39 billion in student debt

🏠 Mortgage rates jump higher, close in on 7%

 📠 Mordernizing Payments in the U.S.(NYT)

We’ve been there before: The person at checkout is holding up the line, trying to pay with exact change, quarters, pennies, dimes, and all.

• Those days have steadily faded as small businesses nationwide shift to cashless, digital-only payments.
  

• The number of Americans who are “cashless” rose to 41% in 2022, up from 28% in 2018. The line moves quicker, and customers don’t have to worry about having exact change.

But there are also numerous benefits to businesses: faster checkout means happier customers, lower labor costs, and more security.

Said one small business owner in Michigan: “I realized that people were hardly keeping a wallet or physical card, which limited my ability to sell and make money. People are not carrying cash. It’s becoming obsolete.”

The drawbacks: A learning curve for entrepreneurs in setting up digital payment systems, inaccessibility of credit cards and even bank accounts for some low-income consumers, and privacy.

• As of 2021, 5.9 million American households had no bank account, though the trend is reassuring. According to the Federal Reserve, that figure is down from 7.1 million in 2019.

• In terms of privacy, cash offers unrivaled anonymity.

For an entrepreneur managing a chain of coffee shops, when the pandemic hit, they noticed that customers didn’t want to use cash, nor did employees want to handle it. Cash transactions now make up just 11% of the business’s sales.

• Pressure is mounting on businesses to adapt to a more cashless world. By the end of 2025, nearly 60% of the world’s population is expected to use mobile wallets.

• In fact, the U.S. actually lags behind others in adopting digital payments. Britain and Sweden lead as the world’s most cashless countries.

Why it matters

The Federal Reserve has recently unveiled big plans to further accelerate the modernization of payments and money transfers in the U.S. with its FedNow program.

• Later this month, dozens of banks and financial institutions plan to roll out the new system, enabling near-instant transaction settlement.

Explained: While Venmo and PayPal provide seemingly instant money transfers, on the backend for banks, transactions still take several days to clear. But that's set to change with FedNow, a 24/7/365 instant-payment system.

• Imagine being able to pay a mortgage bill/rent or credit card statement at the end of the billing period without worrying about the payment arriving late. Or being able to transfer money between accounts at different banks or brokerage accounts for investing with no delay.

In this regard, the U.S. also lags the world — over 50 countries already have similar systems enabling instant payment processing across the financial system for consumers, businesses, and the government.

See you next time!

That's it for today on We Study Markets!

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