It seems that someone forgot to tell the capital market to fall – after a series of collapsing banks, the S&P index managed to continue to rise 4%. Analysts from the two major banks come out with forecasts for the rest of the way:
Morgan Stanley analyst Mike Wilson said “Earnings estimates look increasingly unrealistic, earnings multiples can fall sharply and unexpectedly and the recent underperformance of small-cap companies means it’s close.
On the other hand, Goldman Sachs says that the S&P index will grow by 1% and overtake the expectation slightly. The index will end the year at a price of 4000 dollars. A new report by Goodman Sachs analyst Jan Tzius explains: the chance of a recession over the past 12 months has increased, but only to 35% from 25%. Conditions look better today than they did 15 years ago in the recession led by the banks for several reasons:
The loan market already looks thin: banks have tightened the credit they give since the middle of last year, especially large banks, which have a greater liquidity standard than the smaller ones, are not expected to reduce credit further. The crisis, which was partly balanced by the banks’ losses on the treasury bonds, sent investors to the same bonds which pushed the prices up and reduced the paper losses for the lenders. Which is the opposite of what happened in 2008, when assets that were at the center of the crisis lost more of their value.
In addition, commercial real estate, which is used as a source of great demand for loans from small banks, was already in difficulties, so the reduction in the supply of loans is unlikely to have much effect. All these factors lead Tzius to predict that the current banking crisis will be more “like a strong wind and not a hurricane”.
Today, unlike the 2008 crisis, banks have larger capital reserves, especially the largest banks, where capital requirements were significantly increased after 2008. In addition, they have less exposure to subprime mortgages and commercial real estate, regulation has been increased, and regulators have learned lessons. on the importance of quick and decisive action.
It may also be too early to know what the full implications will be for both the banks and the American economy. Many customers are transferring deposits from smaller institutions to large US banks. Small and medium-sized banks may have to offer higher interest rates to retain depositors or seek other, much more expensive sources of funding. Both options will not help their profitability.
Recent events suggest that existing capital requirements for large banks will be extended to every financial institution in the US which will cause the markets to further correct and require higher equity capital and create a hit to profits.
Problems in the banking sector illustrate how the real economy responds to the Fed’s monetary tightening cycle. The risk is that more restrictive financial conditions and lower liquidity as a result could amplify weaknesses not yet identified in other markets. To ease these concerns, the Fed and other major central banks, including the European Central Bank, the SNB, the Bank of England, the Bank of Canada and the Bank of Japan have announced coordinated action to bolster global liquidity.
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One of them is wrong for sure
One of them is right for sure. This is what analysis looks like, everyone speaks from a position.