Wells Fargo, Goldman Sachs, and Citigroup are all experiencing significant growth. Let me elucidate the reasons behind this upward trend.
The stock market saw a robust day on Wednesday, with major indices like the S&P 500 and Nasdaq Composite up by 1.6% and 1.9% respectively by 10 a.m. ET. However, it was the banking sector that truly shone, with heavyweights such as Wells Fargo, Goldman Sachs, and Citigroup posting impressive gains. Wells Fargo, Goldman Sachs, and Citigroup surged by 6.75%, 5.86%, and 6.86% respectively.
Two primary reasons explain the meteoric rise of these banking giants.
Earnings Exceed Expectations
Firstly, the banks began reporting their Q4 2024 earnings on Wednesday. Unsurprisingly, the reports were exceptionally strong, especially for these three contenders. Wells Fargo may have missed revenue expectations, but it easily surpassed forecasts for earnings. The standout revelation was that the bank anticipated net interest income in 2025 to surpass 2024 levels. Although Wells Fargo primarily relies on consumer banking, investment banking is now a promising growth engine, with investment banking fees skyrocketing 59% year-over-year in the quarter.
Goldman Sachs also exceeded analyst estimates for both earnings and revenue. Net income almost doubled from the same quarter in 2023, driven by strong performance in trading and investment banking. Asset and wealth management was another positive highlight, with revenue soaring by 8%.
Lastly, Citigroup not only surpassed earnings projections but also announced a mammoth $20 billion stock buyback plan, representing around 14% of the bank's market cap. Citi's Q4 results demonstrated strength across both the consumer and investment banking segments. Highlights included a 35% increase in investment banking revenue and a staggering 36% surge in trading revenue.
Tamed Inflation Factors
The second factor contributing to the banking sector's surge was a welcome decrease in inflation. For years, rising interest rates have eroded the net interest margins of major banks, as the cost of capital outpaced loan portfolio yields.
However, this week saw the release of not one but two downwardly revised inflation reports. On Tuesday, the Producer Price Index (PPI) came in significantly lower than predicted. And on Wednesday, the Core Consumer Price Index (CPI) for December stood at 3.2% year-over-year, a mere 0.1% higher than anticipated. This could signal a more aggressive than expected interest rate reduction by the Federal Reserve, which could translate to a profit boost for the banking sector in 2025 and beyond.
[1] Source: Quarterly Earnings Reports for Top U.S. Banks[2] Source: Bank Earnings Press Releases[3] Source: Bank Mergers & Acquisitions Data
Given the strong Q4 2024 earnings reports released by the three banking giants, investors saw an opportunity to boost their finance portfolios. Wells Fargo's surprise announcement of expected net interest income surpassing 2024 levels, coupled with the surging investment banking fees, attracted significant investing interest. Similarly, Goldman Sachs and Citigroup's impressive earnings and revenue growth, along with their promising plans, such as Citigroup's $20 billion stock buyback, encouraged further money allocation in the finance sector.
