July 14, 2020
As previewed, yesterday’s strength in value sectors (Financials, Materials and Energy) came at the expense of high-quality secular growth names within Tech. Financials are generally considered the bellwether of value sectors and we’re expecting incremental direction from money center banks as many report Q2 results this week. As expected, the loan loss provisions from C, JPM and WFC this morning were huge and management teams mostly hinted that Q2 should be the peak in reserve builds, but none said so definitively. C and JPM have large trading and Investment Banking businesses that helped offset much of the credit headwinds and Net Interest Margins (NIM) pressure this quarter, but you can’t count on sustained growth from those two units. Meanwhile, management commentary around the trajectory of the broader economic recovery did little to encourage cyclical rotation. More banks are scheduled to report tomorrow morning (BK, GS, PNC and USB), but unlikely to materially alter the narrative. For now, the relative performance in value sectors looks more like a placeholder rather than the start of a broad rotation and the selling of high-quality secular growth is likely to be shallow/temporary.