To borrow a line from the Rolling Stones, "You can't always get what you want but if you try sometime you find you get what you need". It is a very fitting phrase for a market that needed some solid earnings reports and is getting them.
Equities were having a bit of a pullback heading into this week, as markets were getting used to the idea of a Fed rate hike coming and an overall higher rate environment. While higher rates are tough for the market to digest, the S&P still hasn't gotten more than 3% away from its all-time set back in August. As I wrote on Monday, it's good earnings that can overcome rising rates, and that's what we're seeing.
While it's still early in earnings season, we've gotten some significant news from some major companies. Goldman Sachs (GS) , which reported on Tuesday morning, absolutely blew away expectations as the bank saw strong gains in its institutional clients services (trading) division. GS saw a 34% revenue increase in its Fixed Income, Currency and Commodities (FICC) business from Q3 2015.
There has been a clear pick-up in client activity on the street as we have seen similar results in trading gains from JP Morgan (JPM) , Action Alerts PLUS charity portfolio name Citigroup (C) and now Morgan Stanley (MS) , which just this morning put up a strong quarter, easily beating earnings and revenue estimates.
I think we're seeing a broader trend of banks having finally adapted to the new regulatory environment that they now operate in. Since the financial crisis, banks have had to change their business models, which used to rely heavily on proprietary trading and greater risk-taking for revenues vs. today when banks are restricted from proprietary trading and take much less risk while having to hold higher capital reserves.
For example, in 2007, GS trading and principal investments generated $31.2 billion with $45.9 billion in total revenues. In 2008, trading dropped to just $9 billion in revenues as the crisis hit. Now, in 2015, trading and principal investments is not even a line item anymore in the GS annual report and total revenues were $33.8 billion. While the loss of proprietary trading has had a significant impact on the banks, we are finally seeing them start to make up the lost revenue while taking on much less risk, which is a good thing for markets in general.
Outside of the financials this week, we had a couple of great reports from consumer names Hasbro (HAS) and Domino's Pizza (DPZ) . HAS, which beat on both top and bottom line expectations, had this to say in its press release: "2016 has been a strong year, including our third quarter -- which marked the greatest revenue and earnings quarter in Hasbro's history". The release quoted Brian Goldner, Hasbro's Chairman, President and Chief Executive Officer.
That commentary clearly depicts a healthy consumer. Then we have DPZ who also delivered a fantastic quarter, reporting domestic same store sales growth of 13%! The underlying theme here that we are seeing from names like HAS, DPZ, Ulta Salon (ULTA) and Constellation Brands (STZ) is that the consumer is out there, ready to spend on the right product. So the companies that can deliver the right products and services are in turn getting just what they want -- and need.