Policy Uncertainty: How Will Big Banks Weather the Storm?
Major financial institutions in the United States are gearing up to report a rough third quarter, according to revised analyst profit estimates. Revenue from fixed-income trading declined as much as 30 percent on the year thanks in part to a seasonal slowdown that was compounded by both monetary and fiscal policy uncertainty.
Reuters reports that global investors are trimming their positions in U.S. stocks and bonds because of the opaque policy environment. A survey conducted by the publication from September 13 to 26 shows that investors in the U.S., Europe, and Japan cut holdings of U.S. equities to a four-month low of 41.7 percent, down from 42.9 percent in August. Before the conclusion of a two-day Federal Open Market Committee policy meeting on September 18, the retreat from equities could be explained by a widely held belief that the Fed would begin to taper asset purchases.
That assumption turned out to be untrue, and news that the Fed would continue asset purchases temporarily stimulated the markets before focus turned to the budget debate.
Earnings estimates for several major banks have declined recently. At Goldman Sachs (NYSE:GS), the average analyst estimate for third-quarter earnings per share is $2.61, down from $2.80 seven days ago, and down from $2.99 30 days ago. The average analyst estimate for JPMorgan (NYSE:JPM) declined from $1.39 per share to $1.27 per share. At Morgan Stanley (NYSE:MS), the average estimate declined more modestly, to 48 cents per share from 51 cents per share 30 days ago.
This year to date, Goldman Sachs, JPMorgan, and Morgan Stanley have all outperformed the S&P 500 index. Through Friday, Goldman has returned 21 percent, JPMorgan returned 17 percent, and Morgan Stanley returned 38 percent compared to the S&P 500′s 16 percent. These returns could moderate with the third quarter, during which trading revenues are expected to be soft pretty much across the board thanks in large part to policy — and therefore market — uncertainty.
Major financial institutions are particularly sensitive to monetary and fiscal policy because they rely on interest-rate sensitive instruments like Treasury bonds for as much as half of their fixed-income revenue.
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