There are good earnings reports, and there are better-than-expected ones.
Make no mistake about which one the stock market is celebrating this week when it comes to Wall Street firms: It's the latter.
Morgan Stanley was the latest to report on Wednesday and the latest to get a pop in a share price after reporting a big drop in business that was not as bad as investors were bracing for. For the latest quarter and the first half of the year, however, one can't help but notice all the parentheses placed around the growth rates to indicate declines in revenue and profit on the income statements of Wall Street firms.
Morgan Stanley's not alone, of course. Revenue is down 1.4 percent year-over-year and per-share earnings are 8.1 percent lower for the 18 financial firms in the S&P 500 that have reported second-quarter results so far. The declines were more pronounced for companies closer to traditional Wall Street activities like underwriting, trading and advising on deals and investments. The picture may have become brighter than the bleak image presented in the first quarter, but it doesn't look so hot when compared with last year's performance:
It's troubling when the discussions around a business go from focusing on how fast it's growing to how fast expenses are being cut, regardless of how clever the branding like "Project Streamline" is. And it's hard to see many catalysts that will reverse the industry discussion back to long-term, reliable growth rather than the occasional Brexit-like spasms of panic that goose trading profits for a quarter here or there. Optimists can only argue cyclical versus secular for so long.
Growth from innovation is unlikely because innovation in financial products has largely been frowned upon since the recession, for good reason, and the innovations that have been championed like ETFs are decimating revenue streams elsewhere. Simpler is generally thought to be better, risky assets are shunned, and innovations are focused on automating the old, simple tasks of finance. As a result, much of the traditional business of banking and Wall Street has obviously been beset on all sides by technology-based competition, which started years ago in places like equity market-making and now pressures everything from payments to investment advice.
The Wall Street establishment may be able to commandeer the better ideas of the startups and claim them as their own -- Hey, we have robo-advisers, too -- but the casualties will be once-fat profit margins and the notion that Wall Street is the go-to place for go-getters who want to turn smarts and hard work into fortunes. What's not threatened by automation has been threatened by regulations like Dodd-Frank and the new fiduciary rules, and whatever new or old rules are championed after the elections in the fall.
The flip side is that all of this may be a net gain for the customers of financial services firms, who benefit from lower fees and the reduced likelihood of a crisis that threatens the entire economy at large. So you might need a magnifying glass to see the Stradivarius playing for Wall Street.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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