Fear & Loathing on Wall Street: GS, MS, AMP, SCHW, RJF, SF

April 8, 2025 | Premium Service | Below we provide a summary of last week’s conference call with the subscribers to our Premium Service. We also set up Q1 2025 earnings in the wake of the biggest equity selloff since the outbreak of COVID in 2020 and the collapse of the market for US Treasury securities in March of that year. JPMorgan (JPM) CEO Jamie Dimon says thar the new trade initiatives should be resolved quickly and that is, of course, the hope, but meanwhile trillions of dollars in inflated paper wealth is being destroyed by the Trumpian wave. 

The WGA Bank Top 100 Index has given back virtually all of the gains made in 2024 and then some. Notice in the chart below showing the top 103 public banks in Peer Group 1 by market cap that Flagstar Bank (FLG) is currently the top performer. We sort the group based upon three-month total return (starting from left). FLG is at the top, largely because the stock has not moved while the rest of the group has fallen. Some of the largest banks by assets have dropped from the top quartile into the bottom half of the distribution, with Bank of America (BAC) and American Express (AXP) now in the bottom quartile.

Source: Bloomberg (04/07/2025)

Last week in the conference call for our subscribers, we made several basic points about the current market environment.

• Markets: The equity market selloff since the start of the Trump Administration has essentially wiped-out the gains on financials over the past year and more. We view the media yowling about the tariff policies of President Trump as more of a distraction than substance, but growing signs of a recession and increased credit costs are very serious. We advise our readers to do their homework on names and asset classes that have been abruptly revalued, in many cases appropriately so, but to keep the powder dry until this market volatility begins to subside. 

• The Fed: The market moves in the past four weeks are about risk off in many sectors such as technology and financials that have heretofore been over-inflated. With the 10-year Treasury around 4% yield, President Trump has gotten his rate cut earlier than expected, but how long will this rally last? Remembering that Fed Chairman Jerome Powell held essentially a symmetrical view of monetary policy in the last press conference, a market rally could also see rates move higher if the FOMC does nothing.

• Credit: In our last call, we mentioned our astonishment at disclosures that Bank OZK (OZK) and JPMorgan Asset Management somehow became involved in two separate development projects in the Chicago area. OZK has since seized part of the moribund Lincoln Yards project. We also noted that the Trump Administration is planning to roll back many COVID era forbearance schemes, including for distressed assets guaranteed by the Veterans Administration and FHA, that will result in a significant increase in visible delinquency and the financing costs related to default servicing. More generally, festering consumer delinquency in many markets, combined with lower GDP estimates, are likely to push up credit expenses in Q1 and the rest of 2025. 

The Universal Banks

Like the commercial banks and consumer lenders that we profiled in the past two weeks, the universal banks have seen strong market results and flat to down credit expenses, with the exception of the largest – Goldman Sachs (GS). By comparison, Morgan Stanley (MS) and the other members of our asset gatherers group saw lower credit expenses in 2024, but this is likely to change in Q1 given market conditions.

Wall Street is expected to do well on trading due to market volatility, but will be light on investment banking and other lines. Remember that market volatility can work both ways. Given the increase in high-yield credit spreads and the cessation of new issue activity in March, it is a pretty good bet that the investment banks will miss revenue estimates and see higher credit expenses. 

Source: FFIEC

Note in the chart above that GS continues to report outlier credit losses that are 3x the average for Peer Group 1 and roughly equal to JPM dollar-for-dollar of assets. GS has a gross spread on its loan book over 11% vs 7% for JPM, a stunning illustration of the two business models. Yet the GS stock continued to defy gravity and outperform its larger peers last year. During the Q4 2024 earnings call, GS revealed that it closed on the sale of GreenSky home improvement lender, entered into an agreement with General Motors (GM) to transition their credit card program and sold a portfolio of self-financing loans. 

After getting shellacked in retail banking and white label credit cards, GS now wants to expand their loan offering to private wealth clients. The key question, however, is whether GS can reduce credit expenses after exiting the disadvantageous credit card relationship with Apple (AAPL). GS saw provision for credit losses at $351 million in Q4, primarily driven by net charge-offs in the credit card portfolio and balance growth, partially offset by reserve releases in the wholesale portfolio. The following exchange on the Q4 conference call illustrates the problem:

Mike Mayo: “Why is Platform Solutions still around? I mean, you're number one in deal making, and you haven't been able to work that out. And on the other hand, the financing, organic growth, how big is that today? And how big do you expect that to be in five years? And what about credit risk that's related to that? Thanks.”

David Solomon: “Yes. On the first question, I don't really have anything to say that's different than what I've said about, our journey around the consumer platforms in the business, but I appreciate the question. On the second point, we continue to believe that there's opportunity for us to grow our financing business. Our financing business scales with growth in the world. Of course, we're incredibly focused on risk management, and credit risk, and the scale of that business against our equity base and our balance sheet, et cetera. But as the world grows, we believe there's opportunity for us to continue to grow and scale that business. And I think we've proven that over time.”

Proxy adviser Glass Lewis recommended investors cast advisory votes against the pay of top Goldman Sachs, citing the Wall Street bank's "continued inability to align pay with performance" and retention grants that Glass Lewis called excessive. But the poor performance of the firm comes from more than bad management decisions. Both JPM and GS are saying, in different ways, that they don’t find sufficient demand for their products.

A larger question facing GS and the other members of the group this year, however, is market conditions and a likely shrinkage in new issue market volumes. With bearish sentiment outpacing the bulls for the first time in several years and the overall allocation to stocks falling below 70% for individual investors for the first time in five years, the capital markets are clearly positioned for a correction. Indicators of equity market breadth are still far from showing any signs of a bottom. 

Meanwhile, there is a growing consensus among business executives that the US economy is weakening rapidly, suggesting that a further decline in equity market valuations is likely. "The economy is weakening as we speak," BlackRock CEO Larry Fink told Bloomberg, adding that he foresees more of an economic slowdown in the coming months. Such sentiments suggest to us that credit costs for consumer and commercial obligors are likely to rise sharply in 2025.

The decline in global equity markets will result in a proportional decline in assets under management and thus fees, so we would anticipate a softening in non-interest earnings from most banks involved in advisory business. Basically the increases in AUM seen in 2024 have been wiped off the books, leaving a lot of the firms in our surveillance group scrambling. Fortunately, our group tends to be very attentive to managing their balance sheets and keeps duration short and market risk very low. The US banking industry took $16 billion in losses on securities last year vs $12 billion in 2023 and $4 billion in 2022. 

Source: FFIEC

Guidance for Q1 delivered in the first two weeks of January is not going to be very helpful given the market roller coaster that has seized the financial markets. Not only have broad equity market gains been wiped off the table, but sectors such as technology and new offerings have been decimated. The chart below shows the NYSE composite index and the Invesco KBW Bank ETF (KBWB).

Source: Yahoo Finance

Notice in the chart above and also the table below sorted by 1 month returns that Charles Schwab (SCHW) is outperforming the group on the way down. But GS leads the group measured by 1 year total returns, a reflection of how well the GS common performed last year compared to other large banks.

Source: Bloomberg (04/07/2025)

In Q4 2024 earnings, the whole group showed rising income, led by Raymond James Financial (RJF), Ameriprise Financial (AMP), Stifel Financial (SF). Notice that SCHW, MS and then GS are at the bottom of the range in terms of on-balance sheet asset returns.

Source: FFIEC

The balance sheet assets of the group are likely to remain stable, but the decline in the global equity markets will lead to a decline in AUM and thus fee income. Market volatility should continue to be a source of revenue for this group, but a lack of new issue activity due to political uncertainty and interest rate volatility is a negative going forward. New issuers such as buy now, pay later platform Klarna and online ticket seller StubHub have both delayed IPOs.

The value of IPOs in 2025 so far is on track to underperform the average year of the past decade, while the number of deals so far is higher but of decidedly low quality. “Right now, our outlook is a little bit negative,” Avery Marquez, a portfolio manager for IPO-focused ETF provider Renaissance Capital, told Yahoo Finance.

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