As second-quarter earnings season gets underway with big banks leading the way, John McClain, Portfolio Manager at Brandywine Global, appears on Wealth! to share his market insights.
McClain expects “fairly strong earnings” from the big banks, and hopes “there's nothing too scary to be said for that.” On consumer trends, he expects bank earnings to show “a bifurcated market trend,” with higher-income consumers doing well, but lower-income consumers continuing to struggle with “inflationary pressures.”
But McClain stresses that current market trends go far beyond bank profits: “Everyone's anxiously awaiting the election to come, so I don't think we need to be particularly worried about what banks are saying or what their reaction functions are at this point,” he says.
With AI driving much of the revenue and market rally so far, McClain has a hard time gauging how long the momentum can last, and he expects big AI companies like Nvidia (NVDA) to report “disappointing” earnings this season.
For more expert insights and the latest market trends, click here to watch this full episode of Wealth.
This article Angel Smith
Video Transcript
Earnings season is fast approaching.
The financial sector will again be in the spotlight over the coming weeks, with 40% of S&P 500 companies scheduled to report second-quarter earnings over that period coming from the financial sector.
This is according to FactSet.
Now, big banks are faced with an even higher hurdle to clear after their strong first quarter results.
We are pleased to welcome John M., Global Portfolio Manager at Brandywine.
John, I'm glad you're here.
Now let's set up the financial side.
What song do you expect them all to sing in unison after the big banks make their announcement, or could this be the 10 that will determine the rest of the earnings season?
Yeah, so I guess the financial picture that we're looking at isn't that scary, right?
Well, a lot will be said about loan loss reserves.
There will be a lot of commentary on commercial real estate, but we expect to continue to see fairly robust earnings from banks.
With that in mind, what data about consumers can be inferred from a portion of a bank's revenue?
Well, from a consumer perspective, we are seeing a continuation of the trend of a polarized market, with affluent consumers doing quite well.
The liabilities that they have had historically have been fixed rate, like very low interest mortgages, which are actually assets at this point.
So wealthy consumers are spending well and earning 5% on early-term Treasury bonds or CDs.
Low-income consumers will continue to struggle here.
I think inflation pressures and the erosion of surplus savings will continue.
And speaking to some of the major banks, I think this trend will continue.
And I'm thinking specifically about how the economic weather updates that we get from someone like Jamie Diamond of JPMorgan Chase, usually when he gets a sense of what's going on in the macro economy or he gives some other indication to the public that he's got a sense of what's going on, tend to spook the markets and spook investors.
We'll be hearing from CEOs of major banks later this year – is there anything that should scare investors?
Well, I think it's best not to think too hard about the reaction function over the next few weeks.
It's summer.
Liquidity is relatively dry in financial markets and everyone is anxiously awaiting the elections to come.
So, I don't think at this point we're particularly worried about what the banks will say and how they will react to it.
surely.
Let's talk for a moment about another major theme that has driven this past earnings season.
And with artificial intelligence and NVIDIA being the poster child, how much will this earnings season hinge on NVIDIA?
Well, yeah, look at AI. The S&P 500 is effectively an AI index at this point.
And the bulk of the gains were driven by a handful of stocks, with NVIDIA undoubtedly being a prime example.
So I think there are very high expectations for their earnings report.
Um, and it's going to be really hard to break out of that status quo again, where you have rapid growth in market cap, rapid growth in the underlying fundamentals of the business.
Well, it's hard to sustain that kind of growth rate here over the long term.
So I think we're expecting a potentially slightly disappointing report from them relative to what the market is pricing.
That means if that were to happen, we would likely start to see rotation into other areas of the market.
Where does that expansion best position you for investors looking to take some money off the table or reinvest elsewhere?
What do you see as the biggest benefit of that rotation at this point?
Well, basically everything does, but right now, I think it's pretty strong here given the underlying fundamentals of the larger U.S. economy.
So I think there are a lot of places we could look to redeploy capital from the speculative excess that we're seeing in AI, says John MacLean, global portfolio manager at Brandywine.
Nice to meet you.
Thanks for joining us on the show this morning.
