Quarterly Earnings: Divided We Stand

Earnings from the major banks suggest consumers and big companies are heading in decidedly opposite directions.

As a rule, consumers and big business like to think the same. But this week’s glimpse at second-quarter earnings from US banks suggests that those two are heading in decidedly different directions.

JPMorgan Chase, Citigroup, and Wells Fargo—all banks with large retail and wealth-management businesses—reported higher year-over-year quarterly profits. But Goldman Sachs, with a much heavier tilt toward investment banking, posted a 6 percent drop in profits from the year-earlier period. Analysts expect Morgan Stanley’s trading revenue to take a hit when it reports earnings on Thursday. JPMorgan CEO Jamie Dimon summed up the sentiment best on a call with analysts, saying, “The consumer in the United States is doing fine. The business sentiment is a little bit worse.”

Chad Astmann, a senior client partner and global co-head of Korn Ferry’s Asset & Wealth Management practice, says that a host of economic events have left corporate leaders in finance and elsewhere with fewer weapons in their arsenal to combat a downturn. “Interest rates are near zero and the geopolitical climate of financial and trade cooperation we’ve relied on in past down cycles has receded dramatically,” he says.

Not surprisingly, banks that rely on trading and investing have suffered from trade uncertainty with China and Mexico, along with the potential for interest-rate cuts and slowing growth around the world. But consumers see things in a different light: the Dow Jones Industrial Average is up 18.5 percent on the year. “Serious signs of a softening in America have been masked by a rising stock market,” says Astmann. “There are really no other places to invest with a relatively safe and positive return.”

Michele Pollack, a senior client partner with Korn Ferry’s Global Financial Services practice, says as their own concerns mount, corporate leaders are focusing on shifting their business mix to create long-term stability. Despite posting lower quarterly profit, for instance, Goldman Sachs continues to plow money into consumer-facing and wealth-management businesses. “Leaders are putting more attention in growing business as a longer term play,” says Pollack.

As second-quarter earnings unfold—AT&T, Boeing, Coca-Cola, Facebook, and other big names are still left to report in the coming weeks—the possibility of contracting profits could drive consumer and investor outlooks further apart. More than 80 S&P 500 companies have warned that their second-quarter financial results would be weaker than initially expected, according to the Wall Street Journal.

As a result, experts expect leaders across the board to concentrate on operating better in a leaner environment. Astmann says that may include cutting back on nonstrategic projects and spending, and pouring more into technology investments. But he also points out that with government politics still shifting frequently, leaders should reexamine where they are operating. “Refocus on more financially and politically stable regions,” he says.