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The Markets Breathe a Sigh of Relief as the Big Banks Beat Estimates

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After a rough patch, investors definitely have something to cheer about. Earnings season got underway on Friday with positive surprises from JP Morgan (JPM - Free Report) and Citigroup (C - Free Report) . Bank of America (BAC - Free Report) followed on Monday with an excellent quarterly report highlighted by an 11% return on shareholders’ equity. Double-digits returns are a sign of health for banks and a recent increase in interest rates pushed BAC over the line.

On Tuesday, heavyweight investment banks Morgan Stanley (MS - Free Report) and Goldman Sachs (GS - Free Report) kept the momentum going with their own surprise beats, calming investor fears and dragging the broad markets higher.

Estimates had been trending lower with Goldman and Morgan both receiving 4 downward revisions in the past 30 days, but these two financial powerhouses both turned in results in excess of even the most optimistic forecasts.

Goldman Sachs just seems to find a way to make money quarter after quarter, regardless of market conditions. Their diversified business model includes so many profit centers that even when one division lags, another tends to take up the slack.

Though Goldman’s trading revenues of $3.1B were slightly disappointing against estimates of $3.16B, better than expected results in investment banking, foreign exchange and commodities trading contributed to net earnings of $6.28/share, easily topping the Zacks Consensus Estimate of $5.42/share.

Goldman shares rallied 1.2% on the news.

Morgan Stanley also easily topped consensus estimates of $1.00/share in net earnings, turning in results of $1.17/share -and shrugging off fears of lowered results in an environment of Fed tightening, higher inflation and a trade-war induced slowdown in Asian business

The markets rewarded Morgan shares with a rally of better than 4% at midday Tuesday.

Morgan’s best business unit tends to be equities trading and that stalwart brought in $2B in Q3, slightly better than the expected $1.9B, but surprisingly good results in underwriting and wealth management helped Morgan achieve a return on equity of 11.5%. Assets under management increased during Q3 as did net interest income – aided by higher rates and widening spreads.

Though rising rates, geopolitical risks and trade wars have had the markets on edge lately, at the end of the day it’s earnings that drive equity prices. With 199 companies expected to report this week, we are finally getting a good look at the hard data that matters, and so far, it’s been very encouraging.

US Bancorp (USB) and Bank of New York Mellon (BK - Free Report) both report later in the week and will round out the big-cap bank earnings picture. So far, it’s been a home-run quarter for financial institutions. More positive surprises are almost certain to reassure the markets that the sky is not falling and our biggest institutions are going to continue to churn out profits, even in the face of minor challenges.

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