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Need to Know: Buy bank stocks after Citi, Goldman Sachs, BoA and JPMorgan earnings wowed, says this research group

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Coinbase’s hotly-anticipated initial public offering hogged the spotlight on Wednesday, eclipsing blowout results from banks, which kicked off earnings season with a bang.

Earnings from Goldman Sachs
GS,
+1.05%

and JPMorgan
JPM,
+0.29%

blew past analyst expectations on Wednesday, while peer Wells Fargo
WFC,
+0.06%

saw the biggest post-earnings gain in a decade on the back of similarly upbeat results. The trend is continuing on Thursday with Bank of America
BAC,
-3.13%

and Citigroup
C,
-0.86%

reporting stronger-than-forecast earnings. 

Our call of the day is from research firm BCA Research, urging investors to favor an overweight allocation to bank stocks in their portfolios as a number of factors support continued strength in financials.

First-quarter earnings at the banking giants were boosted by large drawdowns in loss reserves, which were more than double pre-COVID-19 pandemic levels by the end of 2020. As the economic recovery from pandemic continues, banks will continue to release reserves as the need to accommodate for large potential loan losses eases, BCA said.

But moving forward, banks will need to focus on their ability to expand loan portfolios. Banks’ core profits come from borrowing from savers at low interest rates in the short term and lending at higher rates in the long term. The dynamics of fiscal stimulus in the U.S. have caused deposits to surge and loans to shrink, but this is expected to change once the economy reopens, BCA said.

Source: BCA Research.

The vaccine rollout is gathering pace, and some level of COVID-19 herd immunity by September would allow restrictions to ease, buoying consumer confidence and accelerating a recovery in the labor market, said BCA. All of this will encourage spending and another round of re-leveraging, especially since household balance sheets are largely healthy, according to the group.

In fact, this is already happening: The Federal Reserve’s Consumer Credit Survey from February showed U.S. consumer borrowing surged by $27.6 billion — 7.9% yearly — the most since November 2017.

More spending and a drawdown in savings should lift U.S. Treasury yields, according to BCA, with strong growth buoying long-term yields while short-dated bonds face more resistance from the Fed’s accommodative policy stance. This will steepen the yield curve further, BCA said, and that is another boost for bank outlook.

The buzz

ARK Invest snapped up $246 million worth of Coinbase shares after the cryptocurrency exchange went public on Wednesday, in a “watershed moment” for crypto. The fund powerhouse run by Cathie Wood sold Tesla shares worth $178 million to make room for Coinbase
COIN,
-1.88%

in three funds, including the flagship ARK Innovation ETF
ARKK,
+1.18%
.
 

It is a blockbuster day on the U.S. economic front with a wave of data largely beating expectations. Initial jobless claims for the week of April 10 came in at 576,000, far below the 710,000 expected, while there were 3.73 million continuing jobless claims during the week of April 3. Retail sales for March grew 9.8%, outpacing estimates closer to 6.1%, while the Empire State manufacturing index was reported at 26.3, beating the consensus forecast of 20. Industrial production for March grew 1.4%, less than the 2.7% estimated. The National Association of Home Builders index for April was reported at 83, slightly below the 84 expected.

Taiwan Semiconductor Manufacturing Co.’s
TSM,
-2.58%

profits rose 19% in the first quarter of 2021 compared with the same period a year ago. Digital trends boosted by the COVID-19 pandemic have led to a rapid increase in the demand for chips in the last year and caused a global semiconductor shortage.

Ireland’s Data Protection Commission launched an inquiry into Facebook
FB,
+1.55%

on Wednesday in response to reports that a data set containing personal information relating to around 533 million users was made public. The regulator will investigate whether the social-media giant broke European Union data protection rules.

TuSimple, a California-based autonomous trucking group, went public on the Nasdaq. Tied to car maker Volkswagen
VOW,
+1.64%

and backed by logistics company UPS
UPS,
+2.01%
,
TuSimple will rival self-driving projects from electric-car maker Tesla
TSLA,
+0.19%

and Waymo, a division of Alphabet
GOOGL,
+1.89%
.

A study by the University of Oxford found that blood clots are as prevalent with COVID-19 vaccines from drug company Pfizer
PFE,
+1.17%

and biotech Moderna
MRNA,
-1.69%

as they are from drug company AstraZeneca
AZN,
+1.77%
,
a vaccine produced with the university’s help. The AstraZeneca vaccine has come under scrutiny, and its use was halted in Denmark, over blood clot concerns.

The markets

U.S. stocks
DJIA,
+0.79%

SPX,
+0.94%

COMP,
+1.10%

were higher with earnings season under way and bond yields under control. European equities flirted with fresh records
UKX,
+0.63%

DAX,
+0.30%

PX1,
+0.41%
,
with the pan-European Stoxx 600
SXXP,
+0.45%

closing above the all-time high reached just last week. Asian stocks
NIK,
+0.07%

HSI,
-0.37%

SHCOMP,
-0.52%

were more mixed.

The chart

Source: Morgan Stanley.

No, American corporations aren’t just bleeding money — as you might think from looking at the chart of the day, brought to our attention by the Irrelevant Investor blog. The chart, part of recent research from Morgan Stanley, reflects the rise of “intangible investments,” which aren’t included on a company’s balance sheet but rather its income statement. These “expenses,” which include assets like research and development, make companies appear unprofitable. It is an accounting thing.

Random reads

A Canadian Member of Parliament apologized after accidentally appearing naked in a virtual meeting of the House of Commons.

A missing California hiker was found after a geography enthusiast used a mystery photo to reveal his location.

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