More bad news for bank stocks. Wells Fargo (NYSE:WFC) reported its second-quarter profit fell 48% from a year earlier it set aside reserve funds to cover potentially bad loans. WFC stock is whipsawing today in response. Wells Fargo’s profit declines follow similar ones from JPMorgan Chase (NYSE:JPM) and Morgan Stanley (NYSE:MS) yesterday and show deteriorating economic conditions are beginning to impact corporate earnings.
After initially falling 1% when its earnings were reported before the opening bell, WFC stock has recovered and is up about 5% as the market rallies. However, year-to-date, Wells Fargo’s stock has come down 20% to trade just above $40 per share.
What Happened to WFC Stock
Wells Fargo reported Q2 earnings per share (EPS) of 82 cents versus 80 cents that was expected on Wall Street. The bank’s revenue came in at $17.03 billion compared to $17.53 billion expected by analysts for the April through June period. Wells Fargo said its quarterly profit amounted to $3.12 billion, down 48% from $6.04 billion a year ago.
The bank attributed its lower-than-expected earnings to worsening economic conditions as the U.S. Federal Reserve raises interest rates in an effort to lower inflation that is running at a 40-year high in the U.S. For example, Wells Fargo said fees from its mortgage banking unit plunged to $287 million in the second quarter from $1.3 billion a year earlier as higher rates keep homebuyers on the sidelines.
The slowing economy has also forced Wells Fargo to comply with regulatory capital requirements and set aside $580 million to cover potential credit losses. A year ago, the lender’s earnings got a boost from the release of reserves as borrowers repaid their debts and the economy emerged from the pandemic.
Why It Matters
Major U.S. banks are viewed as a bellwether for the health of the U.S. economy. The earnings that have come out in recent days indicate inflation and rising interest rates are taking a toll on American consumers and the overall economy. However, it should be noted that Citigroup (NYSE:C) bucked the trend and reported positive Q2 results that showed it beat profit estimates. C stock is up 7% today on the earnings beat.
Still, the consensus view is that corporate earnings are being hit by economic headwinds and the U.S. economy is being rattled by persistently high consumer prices and aggressive monetary policy tightening by the Federal Reserve. Analysts are now raising the prospect that a growing number of borrowers could default on loans, ranging from home mortgages to credit cards, should the economy fall into a recession.
What’s Next for WFC Stock
WFC and C stocks are each rallying today as the market seeks to end the week on a positive note. But the earnings that have come out of big banks so far do not paint a rosy picture of the health of the economy or the impact on corporate earnings. Should second-quarter earnings continue to miss targets, it could drag stocks even lower in the coming weeks.
On the date of publication, Joel Baglole held long positions in BAC, C, and MS. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.