US Stock Sector Rotation & Big Bank Earnings Explained

All right, it's the end of the week. We're going to try and get this episode as soon as possible, so I can't comment on whether England are now the European UEFA Champions. Feelings before we talk business, Piers? How are we going to do on, uh, against Spain on Sunday?

Well, I'm an optimist, so what score then? So we'll probably lose, uh Yeah, I think we'll probably lose. I mean, look, Spain have been smashing it all tournament, but you know, England, it's all about peaking at the right moment. So the trend is definitely accelerating higher for England. So who knows? You never know. My fingers and toes are crossed.

Yeah, I'm going to call it 2-1 England.

Ooh, he's done it.

Yeah, it's out there.

Coming home.

So yeah, by the time you listen to this, the score will be out, you know, and you can, uh, ask me what the lottery numbers will be next week. Cool. All right. Well, look, plenty to discuss on the episode then. So on Thursday this week, US inflation fell faster than forecast to 3% in June, and that's led to investors to increase now expectations on interest rate cuts in the US. Pushing yields on treasuries lower. Interestingly, on Thursday, and we can use this as a good vehicle for understanding markets better, the Russell 2000 of smaller firms, we'll, we'll dive into this more in a moment, uh, beat the NASDAQ 100 by nearly 6 percentage points, which is a, um, a multi-year large differential of what many people are referring to as a rotation. A rotation trade and a rotation out of specifically tech mega-cap stocks, which have kind of fueled the all-time highs that we've been consistently seeing. So very keen, Piers, to get a breakdown on this. And then finally, we literally just have it on the tape. Markets are about to open on Friday. We're recording this and JPMorgan City has seen up pre-market or flat-ish Wells Fargo though has been hammered. And so just want to dive into some of these first numbers because these front run Goldman's, Morgan Stanley, and so on, which we're going to get next week. So how have they performed division by division, blow by blow, the good, the bad, and the ugly. So perhaps we could start then with the macro first, which was the inflation data.

Yeah. So, um, I mean, if you've been waiting for, you know, really soft inflation numbers, soft being good as in, right, inflation's coming down. Been waiting, if you've been waiting for these for all year, well, they just arrived basically. Definitely the best inflation report of the year. And, you know, it's such an important data set because really it drives entirely the timing of when the Fed will cut rates. So we can talk about Fed rate cut expectations in a second, but just what are the numbers first? So, um, on the headline, so looking at all, you know, the full inflation basket. So remember that, just as a reminder, I guess inflation is looking at, is measuring at how, how the cost of goods in the system are changing over time. So we look at like, how have they changed annually? So we look at something called the year-on-year inflation. So This is for June, right? So prices in June 2024 versus what were the prices of those same goods in June 2023. And so the rate of change there was 3%. Okay, now remember that the Fed, their target's 2%. So clearly it's still well above target. But the important thing is that that number of 3% is actually the lowest reading. Well, we briefly touched, interestingly, briefly touched 3% in June 2023. Then it kind of went back up a bit. We've really gone sideways for 12 months, right? So June 2023, we, we kind of finished a 12 months of kind of sharp downside on inflation. Inflation peaked in June 2022. So June seems to be quite a notable month here in the year, but June 2022 was the peak at 9.1%. By the time we got to June 2023, it dropped sharply to 3%. And everyone's like, wehey, inflation's well on the way back to target, right? Let's start pricing in a ridiculous number of rate cuts in 2024, right? Problem is it basically just hit a brick wall and we've been now above 3% for the last 12 months. But, you know, we've only, we bounced back to 3.7% was the kind of peak of this sort of range of the last 12 months. That was in August last year. So anyway, notably, you know, it's back to 3%, which matches the lowest reading since the whole inflation saga began back in 2021. Okay, so that, that's kind of on the headline. I'm looking at year on year. When you look at that month on month, so this is prices in June '24 versus prices in May '24. This is one of the absolute key numbers of this entire report because the month on month headline inflation reading has a minus sign in front of it. It is -0.1%. Prices have dropped on average across the whole system. That is the first negative reading since May 2020. That is pretty notable, to say the very least. Look, the inflation problem has been around housing, and so finally you're seeing the housing part of the inflation basket, um, come down. That includes things like rent. And actually, rent has been one of the key elements that's been kind of keeping inflation too high. The other big elements that have been really contributing to this inflation bubble is airfares, hotel rates, used cars, right, along with housing. They're your kind of big four that are the responsible ones for this inflation spike. They all dropped sharply. In June. Okay, so it's the first month really where we've seen all of these big items drop, hence why you've got this negative print on the month-on-month reading, first one for 4 years. So look, everyone's getting really excited. Um, what we do like to do though is kind of drill down and think, right, what about core inflation? And this is more important when it comes to the Fed and when they're deciding on when to pull the trigger to cut rates. Core inflation is just taking out some of the more volatile stuff like food and energy. Now, the core inflation number. So again, year on year, first of all, that was 3.3%. So it's higher than the headline inflation of 3%. But what's different about the core inflation chart? It's not like the headline one where we had a sharp drop June '22 to June '23 and then sideways June '23 to June '24. The core inflation chart is entirely different. It's actually been trending down. It's had no sideways period particularly. It's been trending down since 2022. We basically got 2 years of downtrend, but it's been coming down way, way, way slower than the headline reading. And so the, the key about the 3.3% print for June 2024, that is the lowest since, uh, May 2021. So you've got a 3-year low on the core reading. And then some people like to go even further and say, well, all right, how do we get a kind of more of a forward-looking guide as to where this core inflation reading is moving? And basically people take that one month of June and they say, right, well, if we take the June reading and pretend that for the next 12 months into the future it's the same, so you're basically annualizing that one-month print. Then actually there the number's below 1%. And if you take the 3-month average, okay, if you take June, May, and April, and you assume that if you extrapolate that for 12 months, then that has hit 2% for the first time in this whole crisis. So look, there's loads in there. You know, there's nothing that, that is, there's nothing that's bad. In this report. That's cut, maybe one of the key takeaways. It's all good news if you are hoping that inflation's going to be dropping. And so yeah, huge, big, big moves, actually really, really big moves across markets in response.

So several months ago, given what you've described, equities would've rallied quite aggressively because it's like, oh great, the rate cuts are coming.

Yeah.

But that didn't happen.

Well, my favorite stat of yesterday, 400 of the 500 companies in the S&P 500 finished the day higher. And yet the overall index was down on the day. And it's because what's happened in the last, you could really say 12, well, 9, certainly 9 months. Is that generally inflation data has disappointed. Generally, we've had to keep pushing out our timings on when we think the Fed are going to start cutting. And generally speaking, what's been the trade in the meantime whilst we wait? It's buying big tech. So big tech has been through the roof. Um, you know, the Magnificent Seven that we've talked about on this podcast. Incessantly. It seems like forever, right? Well, that's been the play, and, and the, the, you know, the big tech stocks are up huge numbers in 2024. Okay, but so that's been the trade whilst we wait. We'll just park your money, and it's almost like a safe haven, ironically. Um, and that's because this big tech, they're not debt sensitive. We'll have a look at the other sectors in a minute, but Big tech is not debt sensitive, meaning they don't have any debt, right? These big tech firms, they've got cash, they are cash-generating powerhouses. They don't need to borrow any money. So therefore it doesn't matter what interest rates are, you know, in terms of operating their business and cash flow, they don't need to borrow and pay high interest rates, right? So they're benefiting from that. So it's kind of been a weird kind of pseudo safe haven. So yesterday was right. Trigger this possibly. It could be, I don't want to get too ahead of myself here, but it could be that yesterday was the pivotal day of the whole year from an investment strategy point of view, where people said, you know what, this inflation data, there's enough in this inflation report for me to now be confident that we're now into the next phase. The next phase being The Fed are going to cut and start their rate cutting cycle. Remember, it's not just one cut. And because of that, more interest rate sensitive, more cyclical kind of sectors are now going to be positively impacted by that. So if you want to now buy those stocks, well, you need cash to buy shares. But if all your cash has been parked in the Magnificent Seven shares for the last 9 months, well, then you need to sell some of your Magnificent Seven in order to generate the cash to then buy these other stocks, right? So this is what we call this rotation. And this is why you get an inverse correlation and why the Mag Seven dropped sharply yesterday. And if I can just put some numbers on that, on top of the bill, Well, you could say bottom is Tesla, which actually dropped 8.5%. So after our bullish, um, view on Tesla last week, down 8.5%. That's because something else happened yesterday, which was that Musk has delayed his Robotaxi kind of, um, big reveal that was supposed to be in August. He's delayed it to October now. Kind of typical Musk style, you might—

I find, um, that's a little bit like, let's tie a narrative to a decline when you actually put it in the context we were discussing. They have also risen 25% in 2 days, so coming off 8, and, and yeah, robotaxis being delayed, it's like, well, yeah, no, no surprise there.

It's another— yeah, you're absolutely right. And look, when you, when you've got your bank of Mag 7 positions, you know, which ones do you book profit in? Well, look, I'm sure a lot of investors just went, I'm going to book profit across all 7. So Meta was down 4%, Microsoft down 2.5%, Alphabet, so Google, down 3%, Nvidia down 5.5%, Apple down 2.3%, Amazon down 2.3%. These are big numbers in one session. So most investors said, right, I'm just going to lift and book profit across that kind of set, and then I'm going to park that money somewhere else. And then others are going, well, all right, I'm going to put more profit maybe in the stocks that have gone up the most in, in recent weeks. And certainly Tesla's top of that list, right? So definitely a profit-taking, uh, exercise. Um, but yeah, where are they parking their cash then? So if you think about the big kind of— this kind of 10 sectors we break, we break the equity space up into kind of 10 or 11 different sort of subsectors. And actually, so if you look at just that one-day performance, then real estate was the best-performing sector. So a lot of that money that's come out of the Mag 7 has gone into real estate stocks. So why is that? Well, that's a very debt-dependent industry. And so because the cost of borrowing we expect now to drop. This super high inflation rate— sorry, interest rate environment maybe is now coming to an end. Then, right, this is going to boost the real estate sector. You've also got, interestingly, it's a really weird mix. The next best sector performer is utilities. Now that's traditionally like a defensive sector, right? So you're like, hang on a second. If you're trying to argue that rate cuts are coming, so we're going to have a cyclical uplift, so people are now buying these like smaller cap stocks— we'll talk about the Russell 2000 in a minute— why the hell are utilities the second best performer? That doesn't make much sense. Well, it doesn't on that level, but actually utilities, you normally hold utilities for their dividend income. Right, that the utility stocks are typically the big dividend payers. Now, the problem with dividend payers, a bit like bonds and bond yields, right? If interest rates are really high, well, why take risk in owning shares that pay dividends when you can just put your money in a money market account and get your 5% income there for zero risk? So actually, the utility stocks have also been negatively impacted by this high interest rate environment. So if interest rates are going to start to come down, well, all right, utilities may look attractive again. Okay, so that's the kind of thought there. Then you've got your normal cyclicals, you know, materials, industrials, you know, these typically are in line with the economic cycle. So if your view is that rate cuts are coming and we're going to get an upturn in the cycle, then that makes sense. And so they're the best performers. The worst performers, I mean, by a mile was tech. Tech and communications were the big two worst performers in terms of those sectors.

Yeah. And I was looking at, so in technology, you can break technology, you can kind of peel away a few layers and you've got software infrastructure, consumer electronics, semiconductors, software applications, So if you were gonna work in equity research at a sell-side bank, you'd work in one of those domains. You know, it's in tech, an umbrella into one of the subsections. And interestingly, when you drill tech down, there's even a difference in the subsectors. The worst being, you're talking about profit-taking semiconductors, right? So we're not just talking Nvidia, some of the others. So you've got Intel, Micron Technologies, Qualcomm, all, all had some significant hits.

Now, now you've just said that, I'm just thinking, I mean, technology as a kind of a sector, maybe just a bit outdated.

Yeah, I think so.

I mean, it's just so mass— such a behemoth that actually you just need to now break it into its component parts. Each huge in their own right.

Right. So looking at that, perspective on a heat map in technology, not the entire technology area went down. Obviously the mega cap drags it all down.

Yeah.

And that does include software infrastructure, Microsoft, consumer electronics, Apple, semiconductors, Nvidia. But if you look elsewhere, look at information technology services. So services there They were all up, right? Actually. So just trying to think of what sort of companies you've got here. You've got, uh, of all companies, Accenture fits in there. Uh, IBM were up. Uh, Fiserv, Fidelity National Information Services, which is a separate sort of spinoff. Then if you go elsewhere, Software Applications was also up. So it's interesting, it's the services and software side, um, when you break it down. Some of those companies are like ServiceNow, don't know if you've heard of them, they're like the new competitor of Salesforce, the new upstart making headway there. Uber were up 6%. When you see an outlier like that, there was probably Uber news, to be honest, when you see a big move. Um, yeah, and there's other smaller companies you might not have heard of, but yeah, I think you're right. I think, um, there's a status for the mega caps And then you can probably break up technology into several parts, like what we've just discussed with the traditional 11 sectors.

Yeah. And you mentioned small companies there. So that was another key sort of move yesterday. It was out of big tech and into small cap, which again are very, they're typically very cyclical. That just means that their performance and their share price therefore kind of moves in line with the economic cycle. So if you're thinking upturn in the cycle, right, you buy small caps. Um, so the Russell 2000 is the, a really popular, uh, US stock index, which is two, that it's made up of 2,000 small-cap, um, US companies. That was up 3.6% yesterday, which was the biggest, and that's quite a volatile index. Um, but that was the biggest uplift, daily uplift, since, uh, November last year. And, um, and actually, yeah, so, so the Russell was up 5.8%, but actually— oh no, sorry, what did I say? 3.6%. But if you look at the divergence between the Russell 2000 and the NASDAQ, as you were saying earlier, the difference was 5.8% because the Russell went up and the NASDAQ went down. And yeah, that was, that was the biggest divergence between those two since November 2020. So yeah, I mean, it's a very interesting day. Now, I guess the big question is, well, was that a kind of one-day, a one-off? I suggested earlier, maybe this could be a pivotal moment for a proper strategy shift. But is that the case? Is it not? And obviously, time will tell. There was enough in that inflation report for people to hit the button to a degree and actually shift some money. But I'd say we're a long, long, long, long way off there being a full-on pivot. And so what's going to need to happen? Because the issue is, right, this whole inflation thing, it's a delicate balance because sure, inflation back to 2%, great. Rate cuts, great. But what happens if inflation carries on going down and it goes to 1% and zero, and then it actually flips and starts to become, oh, hang on a minute, we've got a real economic problem. Forget about this economic rebound and let's buy cyclicals and small caps. Hang on, maybe we're going to get that recession that we thought, you know, might be coming last year. So you can kind of— I think focus is, whilst still on inflation, of course, I think we'll pivot a bit more back to the labour market now for the second half of this year. Because when you look at things like the unemployment rate, that has over the last— since basically in the first half of this year, it's gone from 3.7% up to 4.1%. That's the wrong direction. That's bad news, unemployment increasing. However, with a lot of these numbers, you can explain it away and pivot it and make it a positive because actually a large part for that increase is an increase in what's called the labor force participation rate. I'm not going to go into that now, but basically there's people rejoining the job market, starting to look for a job again, which is actually a positive thing. So ironically, a small shift up in the unemployment rate here can be interpreted as a positive. Now, will it? Will it— will the unemployment rate carry on going up from here though? I think that's a pretty key question. Will it go 4.2, 4.3, 4.5, 4.7, 5% by the end of this year? If it does, then this whole story might swing again and we might be back to that, oh no, we're going to have a recession kind of mindset. So I think we're at a real key junction. Which created a lot of movement. And it's an interesting moment, but we still don't have by any means clarity on what's coming down the track.

I just wonder with that kind of profit-taking strategy and like a balancing of a portfolio, there's only so much profit, there's only so much position that you can exit on big tech. And so you have to have exposure because of its new status that it holds within this sectoral mix. It feels like you're right. There's probably, you can take some off to deploy cash elsewhere.

Yeah.

But it's not, I, I guess what you're saying that it's not like this is the beginning of the end of big tech and that run.

No. And actually, I mean, look, another way is to look at this from the point of view, well, if you've missed out on the big tech rally, or you didn't— oh, you didn't buy Tesla and you— ah, you've missed out on the big move. Well, what are you waiting for? You're waiting for a meaningful pullback to then go, ah, great, now I can get in. So actually, these big pullbacks, these big one-off pullbacks, can often be a good entry point for new buyers to come in the market and get on this trend that they've missed out on, you know. So By no means am I saying that that's it, that's the top of the year for big tech, because it definitely might not be, um, and it could just be another good buying opportunity. But we all, we also talk about tech, right? I think another important thing that happened yesterday was the dollar. The dollar had a big move, so the dollar weakened. So again, it's all tied into this. We, we have now increased our expectations that the Fed are going to start cutting rates in September. And actually the stats, um, there's now a 91% probability that a rate cut will be coming at the September meeting. It was just 55% probability 2 weeks ago. So that's a big shift in probabilities in a very short space of time, right? So because of that, then the dollar weakens. And so when you look at things like cable, so that's sterling versus the dollar, That made a new— well, it punched up above 129, and it's actually trading the highest it's been since July last year.

So basically— go on, Kia.

Kia, you know what? Just quick pivot to UK politics. Rishi, what an idiot for going early with his general election call, because you know that this week Uh, yeah, the growth, GDP growth double what was expected. Some really positive regulatory news about, um, listing businesses on the London Stock Exchange. You know, sterling's on a tear and Keir's just rubbing his hands in Number 10 going, look, I'm just, you know, I've got the magic touch. Yeah.

And England, England's going to win the Euros now, you know it.

That's right. 100%, which will boost the UK economy. By the way.

Oh yeah. Well, you know, I had this discussion with my wife. We were saying how many people are not gonna turn up to work Monday morning given kickoffs at 8 PM on a Sunday. I was like, yeah, that's a good point.

But I was, I mean, I watched the game on the semi-final in the pub and it was rammed. I mean, literally standing room only, absolutely rammed on a Wednesday night. Now, if England weren't playing, That pub would have been empty. And then if you times that by 10,000, 20,000 pubs across the country, right, that are absolutely rammed full of people, then, you know, it does have a, it moves the needle in terms of consumption and economic activity. And then there's the positive mood, right?

Well, however, I got the train on the commute on the day after and the train was empty. Which means then that the sandwich shops in the city were quiet, which means— so yeah, but I get your point. All right, anyway, back to—

yeah, yeah, sorry, um, what was I talking about?

The dollar.

Yes, Cable's up, uh, highest for 12 months and actually is punching up towards 130 here. Um, and look, the dollar weakened against everything actually on Cable. Just to note, there's a really key— if you're into your technicals, there's a key level. Summer of last year we hit a high at, yeah, about just above the 131, right on the 131 handle. It's a key kind of technical resistance. But, um, but yeah, the dollar weakened. We had that big rotation in the, in the equity space, and then you have bond markets also, uh, rising prices, rising as, as yields, yields dropped. So yeah, big multi-asset shift in markets yesterday in response to this inflation report that really shifted rate cut expectations.

Okay, well, let's move on and talk a little bit about the first of the big bank earnings. And somewhat tied to this, perhaps trying to dive into why there's been quite a significant divergence of the three first to report. So the first being JPMorgan, Citi, and Wells Fargo. So let's start with, let's start with JP. They're kind of seen as the kind of the big one out of the three, I would say. And their Q2 earnings per share beat expectations, $4.24 against $4.19. Revenues $50.99 billion. To put that into context, that is more than, more than double of who else we're going to talk about— Citi, for example, and Wells Fargo. So it just shows how, how big they are. Yeah, a couple of interesting stats. I've kind of just gone through their earnings report just to pull off a couple of interesting points. Investment bank revenues 2.5 billion. Now that number might seem a little bit abstract. It's kind of like, is that big? Is that small? Because I'm talking about 2.5 billion of overall quarterly revenues of 50.99 billion. So when you're talking about a big multifaceted bank like that with many different divisions, you sort of think JP is M&A, right? When you're quite green to this and you're like, well, no, it's, it's 2.5 billion. Of that from a revenue perspective. However, that number was very strong, and that's actually up close to 50%. Yeah, on a year-over-year basis. And I was just having a look, where does JP sit at the moment in the global M&A advisor rankings? So Goldman Sachs is number 1, JP Morgan is number 2. So far this year, um, JP has done 203 deals in the entirety of 2023. They did 162. So here we are just kicking off the second half of the year. We've already smashed through 200. Uh, the actual overall value size of those deals comes in at $443.7 billion that they've worked on. Uh, so yeah, it's, these are big numbers. Um, looking at a traditional bank, then that was on the IB side on the markets side of things. Equity trading revenues were up 21%, $3 billion, strong derivative results. Fixed income trading was up not so much, but 5%. And actually, in comparison, you know, people often think equities is the big business model, but in fixed income, that was $4.8 billion. So, you know, a good $1.8 billion bigger than the equities revenue. Asset and wealth management revenue, that was at $5.3 billion, up 6%. Uh, growth in management fees, and you've said this before with the likes of BlackRock, higher average market levels and strong net inflows that they've seen. On the flip side though, and perhaps you can shed some light on this, I know you have done before, but perhaps just to refresh people, is the net interest income was a key metric here because everything I've kind of mentioned has exceeded expectations. However, this came in at $22.7 billion. So it's a huge figure comparatively, uh, for the quarter. It was up 4%, but the Street was looking for more actually. And that figure of an increase of 4% was below expectations. Their expenses have gone up higher than expected, and the bank also took its highest provision for loan losses.

Hmm.

Since the early days of the pandemic. So yeah, maybe the latter points you could shed some light on.

Well, so net interest income, of course, well, as you've just stated there, it is the big line item on their revenue table, like basically half of their revenue is from net interest income. And so that's very much their loan book. So this is where banks lend money. They lend it to businesses and they lend it to individuals, and then they receive an interest on that loan. All right. So that's your interest income, but then they talk about net interest income, and that's because the money that you are lending as a bank to those companies and individuals, you know, where are you getting that money from? Well, you're actually getting it from your depositors. And you're paying your depositors a little tiny little bit of interest on the, on their bank deposit account, right? And so the net interest income is the interest income from your loan book minus the interest that you're paying to your depositors. Okay. Now, when interest rates are really high, then this is awesome for banks because their loans they ramp up the interest rates they charge on the loans and they do not ramp up the interest they're paying to their depositors. So when you're getting interest rate hikes and high interest rate environments, the spread between the two widens and banks make tons of money. Okay, now because of what we've just been saying, inflation's down, right? Interest rate cut expectations are 91%. The Fed are going to cut. In September. So basically, as soon as the Fed start cutting, this will be the beginning of the end of this amazing, you know, net interest income environment that banks have been enjoying for the last 3 years, and the margins will start to squeeze again. Okay, so that's why we're looking out into the future and saying, right, how much of this, you know, don't forget the biggest portion of their revenue, you know, how is that vulnerable? You know, when's it going to start to decline? How quickly will it start to decline? And of course, this is entirely based on your interest rate expectations, which of course would— there's no certainty on when the Fed might start cutting or how quickly they're going to cut, right? There's a whole load of parameters that are going to be at play to determine all of that. But for now, you know, you're getting like Jamie Dimon, you know, he's actually in a way talking his own book to an extent where he says, look, there's still multiple inflationary forces in front of us, is what he said on the investor call. For example, large fiscal deficits, infrastructure needs, restructuring of trade, remilitarization. So he's saying, look, don't get your hopes up. The Fed aren't— yeah, fine, they might start cutting, but you're not going to get a rapid cutting cycle here. So if he's right, that's good news for the bank's net interest income, uh, book, right? But you could argue, well, if he's right, well, maybe we will get that recession, because if rates stay higher for even longer, which is basically what he's saying, then maybe the recession will end up happening. And in the end, that's not very good for their loan book because people will stop borrowing money or they'll start defaulting on their loans, which is why they've just upped their provision for loan losses in the months ahead, the highest provision for loan losses since the pandemic. So if he's right, then they are right to increase their loan provision and expect more defaults. So But there's lots, there's lots kind of going on here. But yeah, the net interest income is absolutely linked to what the Fed does, which of course is linked to what happens to inflation.

Well, interestingly, we've just heard the opening bell as we're recording this on Friday, and JP are down about 2.5%. So straight from the open, they're down 2.5% on what you've described. And it's difficult for JP because they've gone through a period of just extreme earnings. For a series of time, it's almost like that tech effect of when it's like the bar's so high for them, it almost feels like, but yeah, everything you describe fundamentals all makes sense. So perhaps you could talk the other side then, which is, let's move from, move from like put Citi down for a moment. Let's talk Wells Fargo.

Yeah.

Perhaps that's a name that people are not so familiar with generally, particularly if you're based in the UK. So Why are they down 7.5% at the open?

Ouch. Um, well, JPMorgan are your— it's the biggest bank in the world. It's a very diverse bank in terms of its revenue streams, albeit net interest income easily the biggest. But some of those numbers you threw out there, well, actually, if you take the trading division as a whole, so you take equities and fixed income and everything and pull it together, that was $7.8 billion. You know, bank investment banking, $2.5 billion. They got their wealth side and so on, right? So they've got a lot of fingers in a lot of pies as well as the retail and the commercial banking. Okay. So they're very diversified. So they, it's just so happened that in this environment they've been benefiting from, yes, concern about net interest income sort of, um, You know, perfect conditions coming to an end. But just as that's happening, trading revenues through the roof, deal-making revenues through the roof, right? The problem Wells Fargo have, that if you take, if you put them in the kind of spectrum of banks, they're very much more on the end of the spectrum with regards to retail and commercial banking. Much, much, much less so. They're trying to move and become a bit more of a universal bank like JP where you kind of do a bit of everything. And actually, just a quick stat on that, their investment banking business was up 38%. Amazing, right? But revenues, $430 million versus JP's $2.5 billion. And then their trading business, which again, they're trying to grow and build out, was up 16%. Great. But it was $1.8 billion. JP Morgan's was $7.8 billion. Right. So Wells Fargo is much more geared towards the net interest income. It's all about the loan book and lending, and therefore they're more vulnerable to the perfect conditions beginning to come to an end. And they actually— and it does seem, I don't know, I don't know the details as to why, but the makeup of their loan book seems to be more vulnerable than a JP Morgan's. And that's just because their net interest income is actually down. What was the stat? Down 5.5% year on year. So even though interest rates are still at their highest, their net interest income has dropped. That's probably because, and I'm guessing here, I'd have to go and fact-check this, it's Probably because they've been forced to increase the interest rate on deposit accounts. Um, so which— so although interest rates have stayed high, um, their deposit account interest rates are going up. Plus, because interest rate cut expectations are coming, these banks are starting to cut and slash their mortgage offers, right? And so again, the, the, the amount they're earning on their loan book is declining. So you Wells Fargo are the perfect, like, lead indicator, if you like, for all these other banks that have big loan books. And so actually, they forecasted this year that their net interest income for the whole year of 2024 will be down by probably 9% compared to the year before. And the year before, they made $52.4 billion on their lending book. So yeah, so for Wells Fargo, way more geared towards that. Retail commercial side, which is about lending, and therefore more vulnerable when these conditions deteriorate.

So then looking at the extremes, because Goldman's report on Monday and MS on Tuesday, and maybe MS is a little— if there was a spectrum and you've got, uh, JPMorgan sitting in the full-service bank middle.

Yeah.

You've got Wells Fargo on one end. Which is like you said, lending, commercial banking, that sort of stuff. And then MS probably sits between the center and the pure investment bank. And then Goldman's is more pure play.

Yeah.

So Goldman's is, it's the opposite of JP where JP have been smashing it consistently quarter after quarter. Goldman's has taken a really big hit. However, they are by far and away leading the investment banking charge with this pickup that we've seen in M&A advisory in particular, they, they are the one who's worked on the most deals, the highest volume nominal value of deals. So can we expect then Goldman's to probably be the best of the bunch actually, despite all the negatives that had been going on?

Yeah, they're more geared towards that banking and market side and that, that's firing. Right, on all cylinders, as these numbers show from the banks that have reported today, and because they're more geared towards that side of things, then yes. I was just looking at their share price though, actually. Um, whilst everything you say there makes sense, their share price is all-time highs right now already. Yeah. So, right, it's kind of because we've seen the deal flow has been picking up, right? This is, everyone can see it. So we, we don't need to wait until their Q2 earnings report, like mid-July, to then get confirmation that deal flow is up and their revenue is up. Right, let's buy Goldman's shares. You're too late, right? People have been buying Goldman stocks, yeah, like earlier on in the year because of this kind of expectation. So that's one thing to say. But yeah, Goldman's definitely well placed for this big uptick we've seen in deal flow, for sure.

Yeah. And, and a quick then word on Citi to wrap. Yeah. So one, one of the big figures there I saw was their investment banking revenue was up 60%.

Yeah. Um, I'd say with them, Citi, they, whilst everything we said already applies to them, there's then another layer on top, which is more important, which is their big turnaround project, their big kind of the big restructuring project under, I was going to say new CEO Jane Fraser. She's not new anymore. She's been in the job. Well, I don't know how long now, certainly over 12 months, right? So it's all about this turnaround story. And for them, news on that side hasn't been great because part of that restructuring and turnaround play is about cutting costs. And so whilst they were able to kind of reduce costs by 2%, in the second quarter, that meant their costs were still $13.35 billion, which was more than analysts were looking for. Analysts were hoping, and you could say pricing into the stock, that the expense-cutting part of the restructuring would be better than it actually is. There's a few reasons for that. They've been hit in the last couple of months with a series of Again, again, more like fines from the regulators. They had to pay up $136 million to US regulators for insufficient progress on resolving a pair of consent orders that the Fed and the Office of the Comptroller of the Currency set. I'm not going to go into it. It's a boring thing, but this goes back to 2020, right? But they've ended up having— they haven't made enough progress. Bang, there's $136 million fine. They got fined by the UK regulator. £62 million. That was for a fat finger trade, uh, that was back in 2022 that caused the European stock flash crash. And then they get— they're getting fined in Europe as well. So they got a €13 million fine from the German regulator for basically the same issue. So lots of fines, and it's just hampered them a little bit. So that— that they had been getting on really, really well with the restructuring. It's just kind of Taken a slight turn for the worse. They're kind of still on track, but yeah, that, that's the most notable thing about this report.

Yeah. For those interested, I will do a LinkedIn post either today or over the weekend and I'll share the earnings presentations and you should check out the Citi one. There's a, there's a whole strategic update that basically the others doesn't exist in the other PACs.

Yeah.

The Citi are very keen to press the, the kind of points and hit the right notes. Talking about their vision and their priorities and things of that nature. But if you're applying to that firm, it's great intel to look over some of those bank reports to just get a flavor of what exactly is going on, because they're kind of competency baseline things that you should do if you're going to convince someone of that firm that you know that firm and you want to work at that firm.

Did you see they signed, they made a big new signing? Citigroup, they snapped up a new head of investment banking, nicked him from JP Morgan, a guy called Viswas Raghavan. And part of the package, he's got share options worth $41 million. Wow. As part of his signing-on deal. And that's because basically that was the buyout clause because actually he had $41 million worth of JP Morgan share options. So he is like, well, look, yeah, keen to come over, but I mean, you're gonna have to pay, you know, I, I, I don't wanna lose $41 million worth of share options just to come and join you. So yeah, these big, when you're signing these big players from other banks, it's, it's, it's like big, football transfer fees kind of thing when you're thinking about the share options compensation.

But also like a big transfer, you're gonna rub a lot of people up the wrong way.

Yeah. Indeed.

Such as being a superstar. All right. Thanks very much for sharing your insights, Piers. Thanks everyone for listening, and we will see you next week.

Have a great weekend. Come on, England.