HOT AIR BALLOON FLIGHT

By Julia Horowitz • Friday, October 15

Good morning. In today's newsletter: Big bank earnings cast the US economy in a positive light. Plus, Virgin Galactic shares plunge after the company delays commercial services, and a new research paper suggests that S&P 500 membership could be "for sale." 

 

US stock futures are higher. Markets in Europe also gained in early trading, following stocks in Asia. Oil prices continue to climb.

 

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EARNINGS MONITOR

What big bank earnings tell us about America's economy

The biggest US banks move trillions of dollars around the world every day. That gives them a unique lens on how the economy is functioning, both in the United States and globally. And despite concerns about inflation, workers quitting, supply chain issues and slowing growth, bank executives just delivered a clear message to investors: We're in pretty good shape right now.

 

"While there's been some discussion around the slowdown, I would just note that US economy is now as large as it was ... pre-pandemic," Bank of America CEO Brian Moynihan told analysts Thursday.

 

Wall Street is cheering the latest earnings from America's top lenders, which have released billions of dollars they'd set aside earlier in the coronavirus crisis to cover potential bad loans. The Dow finished Thursday up 1.6%, while the S&P 500 rallied 1.7%. Bank of America's stock jumped 4.5%, while the KBW Bank Index, which tracks the sector, gained 1.3%.

 

So what exactly are banks seeing that makes them feel confident about the future?

 

Spending: Citi reported that credit card spending is up 20% compared to one year ago and is now "well above 2019 levels." Wells Fargo also found that weekly debit card spending was up every week last quarter compared to 2019 as customers shelled out on entertainment and restaurants again.

 

"We continue to see that our customers have significant liquidity and consumers are continuing to spend," Wells Fargo CEO Charles Scharf said.

 

There may be some changes in spending patterns as Covid-era government support dissipates, executives said. But they think the strength will persist.

 

Supply chains: Backlogged supply chains are worrying enough that the Biden administration has announced a "90-day sprint" to fix the problem. But banks don't see it as a game changer.

 

"I doubt we'll be talking about supply chain stuff in a year. I just think that we're focusing on it too much," JPMorgan Chase CEO Jamie Dimon said. "It's simply dampening a fairly good economy. It's not reversing a fairly good economy."

 

Deals: Banks aren't just feeling good because spending is ramping up on Main Street. They're also cashing in on Wall Street, which has seen a huge boom in dealmaking.

 

JPMorgan reported that its investment banking revenue shot up 45% as it raked in fees from advising companies on mergers and orchestrating stock sales. Morgan Stanley saw its investment banking revenue leap 67% compared to a year ago. Citi had its best quarter for mergers and acquisitions in a decade.

 

Does that mean everything is rosy? Certainly not. Citi CEO Jane Fraser said the company is watching three things "closely." There's inflation, including the impact of worker shortages and the energy crunch, as well as the slowdown in China and what happens with US debt ceiling negotiations.

 

But the big picture is that for now, lenders are making tons of money — and they expect the trend to continue.

VOICES

Microsoft's Jacky Wright had to leave the UK to become its most influential Black person

"Part of it relates to having a support group, having role models and seeing what I could be."

 

Read her full interview with CNN Business.

MARKET FLASH

Virgin Galactic's stock is cratering

Virgin Galactic's stock is nosediving after the company said it was delaying the dream of space tourism for its uber-wealthy customers.

 

The latest: The company, founded by billionaire Richard Branson, has announced that it's pushing back the start of full commercial service to the fourth quarter of next year. It had been targeting late third quarter.

 

Shares plunged 18% in premarket trading Friday.

 

Virgin Galactic said its immediate priority is an "enhancement program" designed to improve the performance of its rocket-powered plane VSS Unity and the mother ship from which it launches.

 

But that means customers that have paid six figures for trips will need to wait a bit longer. Virgin Galactic has sold about 600 tickets for future flights.

 

The company's shares were already under pressure. After shooting up above $60 in February, they finished Thursday at $24.06.

 

On the radar: Space tourism increasingly has been dividing the public. On Thursday, Prince William criticized billionaires focused on rockets in an interview with the BBC, saying they should invest more time and money in saving Earth.

 

"Star Trek" actor William Shatner, who blasted into space earlier this week on one of Amazon founder Jeff Bezos' rockets, shot back at the British royal, who he said has "got the wrong idea."

 

"The idea here is not to go, 'Yeah, look at me. I'm in space,'" Shatner told Entertainment Tonight. Instead, the trips represent a "baby step" toward relocating polluting industries to space, he said.

UP NEXT

Goldman Sachs, J.B. Hunt, PNC and Truist report results before US markets open.

Also today: US retail sales for September post at 8:30 a.m. ET.

 

Coming next week: Earnings season marches ahead with results from Johnson & Johnson, Procter & Gamble, Netflix, United Airlines, IBM and Tesla.

WHAT WE'RE READING AND WATCHING

▸ LinkedIn is shutting down its China platform (CNN Business)
▸ Ex-Boeing pilot indicted for fraud in 737 Max tragedy (CNN Business)
▸ Crypto could cause 2008-level meltdown, central banker says (CNBC)
▸ San Francisco Fed President: Inflation will ease (CNN Business)
▸ Netflix loses its glow as critics target Chappelle special (NYT)
▸ Why Europe is vulnerable to surging energy costs (CNN Business)

FINAL WORD

New paper suggests S&P 500 membership could be 'for sale'

Companies are extremely eager to join the S&P 500, and for good reason.

 

Becoming a member of the most prominent index of US stocks helps firms attract significant investment from market players who otherwise may not have purchased shares. It's also a prestigious distinction — the ultimate members club for companies to prove they've "made it."

 

But are spots in the index for sale? That's the explosive question asked in a working paper by academics at the Australian National University and Columbia University recently published by the National Bureau of Economic Research.

 

The paper, whose findings have not been peer-reviewed, claims that companies tend to purchase more S&P ratings of their creditworthiness when there are openings in the flagship index. It also found that purchases "appear to improve their chance of entering the index."

 

In a statement, S&P Global criticized the paper as "flawed."

 

"S&P Dow Jones Indices and S&P Global Ratings are separate businesses with policies and procedures to ensure they are operated independently of one another," the company said. "Our Index Governance segregates analytical and commercial activities to protect the integrity of our indices."

 

Step back: Its assertions aside, the paper is a reminder that the process of joining the S&P 500 involves a good deal of discretion. To be eligible for the index, companies need to be US firms, have a market value of at least $11.8 billion and log four consecutive quarters of positive earnings. The ultimate decision, however, is up to an index committee — and their calls have big consequences for where money flows.