Stock Market Outlook: October 2024

In this issue:

• Net interest income, and how falling rates affect bank stocks.

• Economic data releases, blue chip earnings and more.

Last month, we asked experts what falling interest rates could mean for your bank account — in particular, how they might affect the yields on savings accounts and certificates of deposit (CDs).

But how do they affect banks themselves? That’s a timely question, given that October is a big month for bank stocks. Ten of the world’s largest banks will report quarterly earnings over the next few weeks.

Below is a table of upcoming earnings reports from banks with market capitalizations of at least $100 billion:

Source: Nasdaq.com. Data is current as of Sep. 25, 2024 and intended for informational purposes only.

The effects of falling interest rates on banks are complex. To understand them, we need to get familiar with a somewhat-obscure accounting term: net interest income (NII).

What is net interest income?

Net interest income is the difference between a bank’s lending revenues (such as credit card interest) and its borrowing expenses (such as the interest it pays on savings accounts).

NII is a key measure of profitability for banks, and is one of the biggest line items in the calculation of a bank’s earnings per share (EPS).

How do falling interest rates affect NII and bank earnings?

The answer isn’t always clear. As we noted in our last issue, falling rates could potentially benefit some banks if there is a lag between decreases in their borrowing costs and decreases in their lending revenue.

However, some research suggests that falling rates decrease banks’ NII, as lower rates mean lower potential spreads between interest revenue and interest expenses. For example, a 2023 paper by the Reserve Bank of Australia looked at banking data from multiple countries between 1999 and 2019, and found that “declining interest rates reduce banks’ net interest margins.”

We asked two former bank inspectors how falling interest rates can affect banks, and got two very different answers.

“Falling rates may result in lower earnings for a time,” Ross Meredith, a former bank inspector for the Federal Deposit Insurance Corporation (FDIC) and a director of the BetterInvesting network of investment clubs, said in an email interview.

However, Joe Farrell, another retired bank inspector and BetterInvesting director, expressed the opposite view. “It is my belief that falling interest rates do benefit most banks,” Farrell said in an email interview.

Meredith and Farrell both noted that the effect on a particular bank will depend on that bank’s mix of assets and liabilities.

A bank that holds a lot of variable-rate assets (such as floating-rate bonds) and has a lot of fixed-rate liabilities (such as customers with fixed-rate CDs) will generally be hurt by a decrease in interest rates, as the rates on variable-rate products tend to change more quickly than fixed-rate products. Conversely, a bank that holds a lot of fixed-rate assets and a lot of variable-rate liabilities will generally be helped by a decrease in rates.

What do falling rates mean for bank stocks?

Although Meredith and Farrell had different big-picture perspectives on what falling rates mean for banks, they generally agreed about how the Federal Reserve’s recent cut will affect bank stocks over the next few months: mostly negatively.

“I expect virtually no impact on third quarter results and a modest, muted negative impact on bank earnings in the 4th quarter. Subsequent quarters will see a gradual recovery of any small negative impact seen in the 4th quarter,” Meredith said.

Farrell had a similar short-term outlook on bank stocks, but for different reasons. “Since the Fed dropped rates only recently, we should see practically no effect on quarterly earnings. However, bank stock prices may be adversely affected by the unrealistic perception that a small drop in rates will cause large declines in earnings per share in [the fourth quarter of 2024],” he said.

So the Fed’s recent cut is unlikely to move the needle in the upcoming bank earnings season — but it could create some opportunities to buy the dip in bank stocks in the quarters ahead.

» Take a look at the best brokerage accounts for stock trading.

Dates that could move markets this month

Economic events

• Friday, Oct. 4: Bureau of Labor Statistics monthly employment report. A report showing hiring levels and various measures of the unemployment rate. 

• Thursday, Oct. 10: BLS consumer price index (CPI) report. A key inflation gauge. The employment and CPI reports could give investors hints about what the Federal Reserve will do with interest rates in future meetings; unexpectedly high unemployment or low inflation could indicate that rate cuts are on the way. 

• Friday, Oct. 25: Michigan Consumer Survey data for October. The University of Michigan will release its final data for last month’s survey on Oct. 11, and its preliminary data for this month’s survey on Oct. 25. The survey has become a closely watched indicator of ordinary Americans’ perceptions of the economy.

• Wednesday, Oct. 30: Bureau of Economic Analysis first estimate of U.S. gross domestic product (GDP) in Q3 2024. A measurement of whether the economy grew or contracted over the quarter.

Earnings

Below is a table of blue-chip stocks that are reporting earnings in October, with the expected dates and average analyst estimates for their upcoming earnings reports.

We’ve filtered the list for companies with a market capitalization of at least $200 billion. These are high-volume stocks whose earnings reports are often major trading events for options traders and day traders.

No data above? Log in or register for a NerdWallet account to see the full earnings calendar.

Source: Nasdaq.com. Data is current as of Sep. 27, 2024, and is intended for informational purposes only.

» Want to start trading options? See our picks of the best options trading brokers.