Something unpredictable happened last week that is so positive I almost hesitate to write about it: The banks became extraordinary performers. The percentage gains for bank shares and the pretty stock charts, all wondrous, look like they are in their infancy. When JPMorgan and Wells Fargo each sell at just 9 times earnings, there’s a real possibility of a catch-up move of large proportions before they even get near to expensive — especially if Federal Reserve Chairman Jerome Powell gives a hint of a rate cut down the road. Now, of course, the entire market is all abuzz and atwitter (that’s still a word!) about generative artificial intelligence, and for good reason. As I explained in my missives all last week, one year after ChatGPT emerged as more than just a magic trick, plenty of companies are adopting the technology, even as they search for ways to use it. It’s no wonder that Salesforce and ServiceNow have had good runs lately: Both companies actually integrated generative AI into their suite of offerings. When Salesforce CEO Marc Benioff talks of trillions of queries for Einstein — the integrated set of AI technologies developed for its customer relationship management (CRM) platform — he’s speaking about how salespeople and executives at companies try to learn from their own data, as well intel not available from other sources. The joy around ServiceNow’s stock is simply a sense that the company knows how to tackle generative AI for its corporate clients. There’s an undercurrent of confusion about the technology, including costs, that is causing many companies to rent, not own, the magic. This means the stock of Snowflake will remain hot on the griddle. The problem with all of these AI-related stocks, including chipmakers Advanced Micro Devices and Nvidia , is the impossibility of huge percentage gains without overextending. The stocks have moved so much that they can’t get you 25% gains from here, maybe not even 10%. Now compare these tech stocks to the bank stocks, which are so far behind the rest of the market that they look like utility stocks with low dividends. The lack of recovery from so many regionals means they can advance 25% and still have high dividends. If the economy is going to avoid recession, and it is hard for me to think that it won’t, these stocks may be the actual bargains in this stock universe. They are the cheapest of the cheap, stuck in a netherworld born of the regional banking crisis this past spring. Any decline in interest rates makes their bond portfolios a much less toxic affair. Consider that Charles Schwab shares teetered in the low $50s because the discount brokerage was supposed to be next. That didn’t pan out for the bears now, did it? So what to make of where the money is here? JPMorgan’s stock should not be at 9 times earnings. That makes little sense whatsoever. The company did have a good quarter. But we have isolated the best regional in Wells Fargo, which has been held back by the sins of its fathers even as CEO Charlie Scharf finally has his team in place and it is the most “regional” of the nationals. No banking analyst would disagree that Wells had the best quarter of the group. It is still operating under consent decrees and strictures that, increasingly, make no sense. But at this point, if rates decline, I don’t even care. The stock will move up. Morgan Stanley is a tougher sell. It delivered the numbers, but not in any substantive way, and it was a real disappointment. I can’t condone that. The stock of Goldman Sachs (GS) seems more of coiled spring. But Morgan Stanley has two things going for it. One, it has already been hit to the point that its dividend yields 4%. And secondly, it’s at a level that presumes there will be no improvement in takeovers and issuance. The former is a little ahead of where I expected. It would be a lot ahead if it weren’t for the Federal Trade Commission going rogue . The latter seems ripe. Consider all the biotech takeovers in the last month. There are plenty eager for public money. And the trajectory of Arm Holdings (ARM) shows you that the market is eager for tech deals. Is this the ideal financial package? Shouldn’t we want a combination of First Horizon and Regions ? Maybe Huntington Bancshares and KeyCorp ? They all make sense but I do want to stay away from anything controversial. Sure, Wells was once controversial, and Morgan Stanley did not have a good quarter, but these two will fit the bill for the moment. Let’s step back to see the big picture. Markets led by tech tend to be narrow and involve mostly enterprise software, which all sound like they are involved in the same pursuits and are usually limited to about 15% of the entire S & P 500 index and slightly more in the Nasdaq Composite. Markets led by the financials, particularly the non-tech financials, are solid and are very hard to fault. They really take the proverbial wind out of the bears’ sails. That’s what makes this moment so strange. We have a chronic overbought condition that shows no sign of letting up, which only happens in the best of prospects. So I would stay focused on the financials above all other stocks right now. They don’t have GLP-1 exposure to red-hot diabetes and weight-loss drugs. And they may lack ChatGPT exposure. But they are going to fly if we get anything remotely not hawkish when the Fed speaks Friday and the higher-yielding financials should move the most. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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A Wells Fargo customer uses the ATM at a branch in San Bruno, California, on Aug. 8, 2023.
Justin Sullivan | Getty Images
Something unpredictable happened last week that is so positive I almost hesitate to write about it: The banks became extraordinary performers.
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