Recession Now Seems More Likely Than Not—Here’s What Big Bank Earnings Revealed About The Economy

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Fourth-quarter earnings season kicked off Friday morning with a slew of big banks reporting a mixed bag of results—with some doing better than expected while others saw profits cut in half amid the market turmoil in recent months—but one theme remained clear across the releases: The U.S. still faces a potential recession this year, and unemployment is likely to rise even if the economy ultimately avoids one.

Wells Fargo profits tanked 50% last quarter, and JPMorgan is now eyeing a “mild recession” in the … [+] fourth quarter.

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Key Facts

Among the hardest hit stocks Friday morning, shares of Wells Fargo fell as much as 4% after the bank reported profits collapsed 50% to $2.9 billion in the fourth quarter as earnings from its home-lending business tanked 57%, with higher interest rates driving down demand in the housing market and resulting in lower mortgage originations.

JPMorgan, the nation’s largest bank by assets, reported better-than-expected earnings but also issued a cautionary note: The firm said it set aside $2.3 billion last quarter to help remedy potential losses in the near term as a result of a “modest deterioration” in the economic outlook, which now reflects a “mild recession” expected to hit in the fourth quarter.

JPMorgan’s economists believe the recession could push the unemployment rate up to 4.9%—effectively wiping out more than one year of job growth with millions of Americans losing jobs, CFO Jeremy Barnum said on a conference call Friday; in a same-day conference call, Bank of America CEO Brian Moynihan also called for a “mild recession” this year.

“Negative markets had a substantial impact” on BlackRock, the firm’s billionaire CEO Larry Fink reportedly told employees Friday as the world’s largest asset manager reported earnings, which showed assets shed $1.4 trillion in value over the past year.

Though the chief was much more upbeat in a note to shareholders Friday morning, saying he remains optimistic this year will ultimately benefit long-term investors, BlackRock earlier this week said it would cut 500 jobs this year to deal with economic uncertainty—joining financial giants like Goldman Sachs and Morgan Stanley that have conducted layoffs in recent weeks.

Crucial Quote

“The economy still appears to be recession-bound,” Oanda analyst Edward Moya said of the disappointing start to earnings season, predicting the number of companies announcing layoffs and cost-cutting measures will only grow this quarter.

Key Background

Amid record consumer spending and crippling supply chain constraints, inflation skyrocketed to a 40-year high of 9.1% in June—pushing the Federal Reserve to embark on its most aggressive economic tightening campaign in decades. With the central bank’s rate hikes slowing down the economy, several Wall Street firms have warned of an impending recession this year, and on Tuesday, the World Bank cautioned the global economy is “perilously close” to a downturn. However, some experts have been more optimistic. On Tuesday, JPMorgan chief Jamie Dimon told Fox Business the U.S. could ultimately skirt a downturn, with both companies and consumers “still strong . . . and in good shape.” The billionaire also walked back comments made last summer about an impending “economic hurricane,” saying instead that “it could be nothing,” and that “early storm clouds already hit,” with the stock market falling 20% last year. After falling 19% last year, the S&P 500 is up 4% this month.

What To Watch For

Earnings season is just getting started. Morgan Stanley, Goldman Sachs and United Airlines are slated to report on Tuesday, followed by Netflix, American Airlines and dozens of other firms later in the week.