By Joyce Yu
Philadelphia, PA–Led by mixed reports from two American banks, U.S. stocks drifted higher Wednesday after Tuesday’s roller coaster ride.
In its fourth quarter earnings report, Bank of America Corp. beat estimates and indicated that it could benefit from the U.S. tax overhaul by reducing pressure to cut future costs. This is in contrast to Goldman Sachs disappointing earnings report, which showed a collapse in revenues from bond trading and a one-off charge from tax reform have taken big bites out of Goldman Sachs’ profits, forcing the bank to report its first quarterly loss since 2011.
However, Goldman Sachs’ report is not totally unexpected. Three weeks ago the bank had warned that a roughly $5bn tax hit mostly connected to the revaluation of tax credits and a new, one-off levy on earnings stashed overseas. The bank had also made dark noises about the core fixed-income, currency and commodities (FICC) trading business, which had been hurt by a lack of market volatility. In the end, FICC revenues for the period were down 50%, the worst performance of Goldman’s peer group.
Investment banking, on the other hand, was encouraging on the back of strong economic growth and a pick-up in business activities. Revenues from M&A during the fourth quarter grew 9% and that from equity and debt underwriting, went up 117% and 61% respectively. The investment management business also seemed solid with fees up 12% to $1.4bn.
As of now, most big corporates expect for Goldman Sachs, reported better-than-expected earnings. . Citigroup posted healthy earnings and General Motors surprised the market by predicting steady profits in 2018 and growth in 2019. UnitedHealth also raised its adjusted profit projection due to the recent tax overhaul. As a result, the Dow Jones Industrial Average rose above 26,000 Tuesday for the first time, before giving up gains as the session went on. The reversal took place as investors worry about a government shutdown – the Congress needs to pass a spending bill by the end of Friday to avoid it.
Robert Pavlik, chief investment strategist at SlateStone Wealth, told CNBC that there were concerns in the market that stocks had risen too much too quickly. “The government shutdown played right into that,” he said. “I think the pullback was cooler heads prevailing. I don’t want people chasing the market and pushing it higher for no reason.”
Martin Feldstein, one of the most influential Republican economists of the last 40 years, wrote in a column story published on the Wall Street Journal that the stock market is poised to plunge. He expects stocks to tumble as interest rates on bonds start to rise.
