Wall Street is at war with itself over the future of stocks
A debate is raging on Wall Street, sometimes within the same firm. AP / Richard Drew
JPMorgan is a house divided ... by the stock market, that is.
In one corner stands Dubravkos Lakos-Bujas, the firm's chief US equity strategist. Weighing in with a steadfast focus on rapidly growing corporate earnings, he sees the S&P 500 finishing the year at 2,550, roughly 3% higher than the benchmark's close on Monday.
In the other corner is Marko Kolanovic, JPMorgan's global head of quantitative and derivatives strategy. He's an established industry heavyweight — a man whose opinion is so valued, and whose warnings are so heeded, that he was credited for a sharp market sell-off last week. It came immediately after the publication of a scathing research note that likened the current environment to the one leading up to the 1987 stock market crash.
While it's not entirely uncommon to see two strategists in the same firm hold opposing views on the same subject, the juxtaposition of the two is still jarring. And, it's serving as a handy microcosm for the market: Compelling arguments can be made on both sides of the buy-or-sell debate, and a great deal of nothing is happening as a result.
The stock market has never been more sapped of volatility in its long history: On Monday the S&P 500 finished almost unchanged, while the Nasdaq and Dow indexes moved in opposing directions.
On the bearish side of the ledger, we've seen recent hang-wringing over the unwinding of the Federal Reserve's balance sheet and dwindling cash stockpiles. The group includes not just Kolanovic but also the chief investment strategist at Bank of America Merrill Lynch and a handful of worried hedge fund managers.
On the other side are many of the equity strategists at Wall Street's biggest firms. In addition to Lakos-Bujas' recent S&P 500 price-target hike, Robert W. Baird's chief portfolio strategist, Brian Rauscher, boosted his to 2,570 around the same time, also citing rising corporate profits.
On Monday, Oppenheimer's chief investment strategist, John Stoltzfus, pumped his year-end S&P 500 price target to 2,650 from 2,450, making him the second-most-bullish analyst on Wall Street, trailing only Mike Wilson of Morgan Stanley.
At the end of the day, Stoltzfus just couldn't get past the robust earnings growth that US companies are enjoying. The S&P 500 is expected to see profit expansion of 8.8% in the second quarter, which would be its fourth straight period of growth. The benchmark's 14% earnings growth last period was the best in more than five years.
On a broader basis, a 20-person group of strategists expects the S&P 500 to finish the year at 2,488, which is less than 1% above Monday's close price, according to a survey conducted by Bloomberg. While that may seem like a meager forecast, ending 2017 in that area might still be considered a success, especially considering some experts are calling for a market top as soon as August.
And while it may be tough to get excited about such a low threshold, many traders would be happy to simply eke out a few more points of gains while warning bells sound.
NOW WATCH: Wells Fargo Funds equity chief: Shorting anything is 'playing with fire' Wall Street is livid over Wells Fargo's latest scandal: 'Here we go again'
Barker noted how the problem was identified in July of last year, but was not disclosed to investors and the public until last week.
"Why didn't the company address these issues publicly while they were already dealing with the account scandal rather than address them now?" he wrote. "What other collateral damage may have been caused by the re-possession of these cars on peoples' lives?"
Barker reiterated his neutral rating for Wells Fargo and his $52 price target for the shares, representing 2 percent downside to Friday's close.
In similar fashion, JPMorgan also focused in on the bank's lack of disclosure and its culture.
"It is very surprising that Wells Fargo has not changed the opaqueness in its disclosure and only disclosed this late on Thursday night when it realized a news story was about to break," JPMorgan analyst Vivek Juneja wrote Monday. "This raises the question about what other changes Wells Fargo needs in its culture. There has been no change to the Board despite all the scandals, which has been frustrating some shareholders."
Juneja reaffirmed his $57 price target for Wells Fargo shares and his neutral rating.
Sen. Elizabeth Warren pressed Fed Chair Janet Yellen on July 13 to remove all of the Wells Fargo's directors who were on board during its fake accounts scandal revealed last year.
In September, Wells Fargo reached a $185 million settlement with regulators over creating what the bank then said could be as many as 2.1 million accounts in customer names without their permission.
On latest auto insurance scandal, the bank apologized and said it moved quickly to end the program Thursday.
"We take full responsibility for our failure to appropriately manage the collateral protection insurance program and are extremely sorry for any harm this caused our customers, who expect and deserve better from us," Franklin Codel, head of Wells Fargo Consumer Lending, said in the statement. "Upon our discovery, we acted swiftly to discontinue the program and immediately develop a plan to make impacted customers whole."
Wells Fargo shares have under-performed the market this year. Its stock declined 3.3 percent year to date through Friday versus the S&P 500's 10.4 percent return. The shares rose 1 percent Monday.
A proposed class action lawsuit was filed Sunday, which accuses the bank of racketeering violations and fraud over the auto insurance scandal.
Catherine Pulley, a spokesperson for Wells Fargo, sent the following statement for this story:
"Wells Fargo discontinued its Collateral Protection Insurance (CPI) program in September 2016 after finding inadequacies in vendor processes and our internal controls that negatively impacted some customers. We announced a plan to remediate auto loan customers who may have been financially harmed due to issues related to auto CPI policies placed between 2012-2017. We are very sorry for the inconvenience this caused impacted customers and we are in the process of notifying them and making things right."
—CNBC's Jeff Cox and Leslie Shaffer contributed to this article.
Wall Street Regulators Are Set to Rewrite the Volcker Rule
Wall Street regulators have agreed to rewrite the Volcker Rule, according to three people familiar with the matter, moving to loosen industry-despised restrictions that were central to the U.S. response to the financial crisis.
The five agencies that wrote the original limits on banks investing with their own capital have decided to begin working together on a revision, said the people, who requested anonymity because the discussions aren’t public. The changes discussed at a closed-door meeting on Friday will likely give big banks more flexibility for handling client trades, as well as investments in private equity and hedge funds.
The planned rewrite of Volcker highlights the administration’s efforts to use agencies to roll back regulations without having to go through a Congress that has failed to advance many of President Donald Trump’s other priorities. Regulators aligned with Trump have indicated they’ll be guided by Treasury Secretary Steven Mnuchin’s June report calling for “significant changes” to the rule, which was designed to rein in risky trading after the financial crisis.
The agencies can revise the 2013 rule’s text, but unless it is repealed, there’s only so much that can be done to answer years of lobbying by financial titans including Goldman Sachs Group Inc. and JPMorgan Chase & Co.
While the agencies agreed to start editing the rule during a meeting of the Financial Stability Oversight Council -- a panel of regulators led by the Treasury secretary -- at least one of them is also looking to gather outside input. The Office of the Comptroller of the Currency is poised to request public comments on Volcker, according to Keith Noreika, who is running the agency on a temporary basis.
Trump’s election and appointment of bank-friendly regulators raised hope in the industry that the rule would be changed, and the president’s lieutenants have signaled their intent to do so. Mnuchin told lawmakers last week that Treasury was working with regulators to clarify the rule. He also told them that he wouldn’t object to Congress repealing Volcker, but that his department was focused on how to fix it.
Read more: Why the Volcker rule review is music to bankers’ ears
“We had a thorough and constructive dialogue on the Volcker Rule last week,” Mnuchin said in an emailed statement after being asked about Friday’s agreement. “During the discussion, the FSOC member agencies shared many good ideas on how the Volcker Rule could be improved. I look forward to continuing to work with our banking and market regulators on modifying the rule.” Spokesmen with the five regulators declined to comment.
The rule named for former Federal Reserve Chairman Paul Volcker, an early champion of the concept, has been controversial from the start. It was meant to prevent lenders with federal deposit insurance from making big market bets that could lead to outsize losses. Proponents argue that the restrictions have made markets safer and say that banks still make billions on trading. Critics say it has made banks too conservative, prompting a retrenchment from certain markets that has dried up liquidity.
Wall Street’s most frequent complaint is that Volcker is unclear in what it bans, so the banks are forced to stay far away from the edges of what’s allowed.
The Treasury report called for exempting banks with less than $10 billion in assets from the rule completely and giving all lenders more leeway to trade. Restrictions on banks’ investing in private-equity and hedge funds should be loosened, Treasury argued at the time.
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