Over the weekend, talks between the US and Iran fell apart. The US is blocking the Strait of Hormuz to put economic pressure on Iran. The market went up this week as there is still hope that a settlement will be reached. We will have to see. We've had 17 years of amazingly benign credit quality and investors are wondering if the good times are over. The banks kicked off earnings season and I'm going to share some thoughts on a bunch of the large banks that reported because they provide great insights into the state of the current credit cycle. We can get a closer understanding of whether the problems in the private credit sector are broadening into a larger credit cycle. As the banks go, so goes the economy.
Hi, this is Steve Eisman and welcome to another episode of the weekly wrap. This is for the week ending Friday, April 17th, but recorded Thursday night, April 16th. I'm excited to share that in a few weeks, we'll be announcing an additional feature to the Real Eisman Playbook alongside our existing Monday and Friday episodes. This is something we've been building behind the scenes and it's going to take things in a really exciting new direction and we'll be revealing more soon. Make sure you're signed up for our mailing list on our website, realeismanplaybook.com, so you're the first to know.
Before we get to the wrap, I want to comment on something. I often get requests from viewers to provide more trading ideas. And that's not something I tend to do for two reasons. First, I'm not a trader. I've always taken a long-term perspective. Trades do not come naturally to me. That's just me. However, there is another reason. Taxes. After all, it is tax season. For most investors, if they are going to do a trade, it also means selling something to make room for it. Then, however, you have to pay taxes. And today, those taxes can be high, often 30% plus. The trade better be really good if you have to pay those taxes. In my view, it's just easier for most investors to invest long-term. And now, let's go to the wrap.
In this week's wrap, we will discuss three things. One, the war in Iran. Two, banks reported and their credit data provides an important window into the health of the US economy. And three, mailbag, where I answer questions from three viewers. First, the war. Over the weekend, talks between the US and Iran fell apart. The US did not resume bombing Iran, however. Instead, the US is blocking the Strait of Hormuz to put economic pressure on Iran. Monday morning, oil prices jumped above $100, but quickly went back below $100, and the market went up this week as there is still hope that a settlement will be reached. Markets will continue to trade headlines.
Now, we dropped an extra episode on Tuesday, April 14th, this week, with John Spencer, chair of War Studies at the Madison Policy Forum, and we did a deep dive into the conflict and the likely outcomes. We did this episode specifically to shed as much light as possible on how and when this conflict will end and how long the consequences will continue impacting the economy and markets. Now, at the end of the first quarter, the S&P was down 4% for the year and NASDAQ was down 7%. Both are now up on the year and are at record highs. I think the market is assuming the war will be over very soon. Whether that's true or not, we will have to see.
Moving on to stocks, the banks kicked off earnings season, and I'm going to share some thoughts on a bunch of the large banks that reported and then show you how to think about valuation given the results. But before I do that, I first want to focus on how the large bank results are of particular importance because they provide great insights into the state of the current credit cycle. The four large banks that reported — JP Morgan, Citi, Wells, and Bank of America — have large and broad-based lending businesses. On the consumer side, they do credit cards, auto loans, and several other types of consumer loans. And on the commercial side, they make commercial real estate and corporate loans and other types of commercial loans as well. They don't do everything, but they are big enough and broad enough to provide a real window into the health of the US economy.
By analyzing the credit results of these four large banks, we can get a closer understanding of whether the problems in the private credit sector are broadening into a larger credit cycle for the overall economy. As you all know, there is growing fear that credit losses will start to mount for the first time since the Great Financial Crisis. We've had 17 years of amazingly benign credit quality, and investors are wondering if the good times are over. Yes, private credit is exposed to software, no question. And software is getting hit hard by AI. But are there signs of broad credit problems emerging in the actual data?
When the major banks report, they show reams of data. JP Morgan's earnings release supplement is 28 pages long and is filled with data on every page, and that is typical of how the large banks report. So to see trends in credit quality, the best place to look is to examine consumer and commercial nonaccrualing loans. A nonaccrualing loan is a loan that is seriously delinquent, usually defined as 90-plus days. A bank no longer reports interest income from these loans and also reserves for future losses. I am putting on the screen consumer and commercial nonaccrualing loan data for JP Morgan, Wells Fargo, Citi, and Bank of America for 1Q25, 4Q25, and 1Q26, the quarter just reported.
These four banks combined provide a large window into credit quality trends. If there was a serious trend of deteriorating credit, we would see increases in nonaccrualing consumer or commercial loans on a year-over-year basis and a quarterly sequential basis. We certainly saw large increases in consumer nonaccruals leading up to the Great Financial Crisis, but we are not seeing that now. The credit data is fairly benign in both consumer and commercial. For those of you who are audio listeners, I'll just focus on JP Morgan and Bank of America. For JP Morgan, total nonaccrualing loans were $9.6 billion in 1Q26. They were up 11% year-over-year, but down 3% versus the fourth quarter. The numbers were even more benign at Bank of America. 1Q total nonaccruals for Bank of America were $5.8 billion, down 4% year-over-year and flat with the fourth quarter.
My conclusion: the credit trends reported by the large banks are very benign. Now maybe a credit cycle will emerge, but we are not yet seeing it in the banks, and that is a very important data point. The banks have the broadest credit exposures, so their results are a concurrent indicator. As the banks go, so goes the economy. And this brings me to my conclusion about the state of the US economy. Since the Great Financial Crisis, many commentators have tried to predict the next crisis. This is it, they say, and then it isn't. Perhaps the most important story of the past 17 years is how powerful and resilient the US economy has become. Yes, there are problems in private credit with respect to overexposure to software, no question. And perhaps these software issues are harbingers of an approaching credit cycle. Yet the banks have shown once again that credit quality in the US is okay. Until that changes, the US economy will be fine. Fine, yes, but we do have a K-shaped economy. So it's not fine for everyone. That's a very important point to emphasize. But I just don't see a recession on the horizon as long as bank credit quality is benign.
By the way, partially because of the benign credit statistics reported by the banks this week, the entire private equity and private credit sector rallied this week. This earnings season, the large banks also provided more data on their exposures to private credit. Wells disclosed $36 billion in exposure to private credit, with companies in business services, software, and healthcare industries making up about half of that amount. Software in particular accounts for 17% of the total, or $6 billion. Most of the loans, however, have about a 40% cushion, meaning that the loans would have to suffer losses greater than 40% before Wells suffers any losses. That's not bad. However, Wells is having issues here. It is a lender to Market Financial Solutions, which is a fraud, and is also a lender to Go Easy, a Canadian non-prime lender that is having problems. On its conference call, in response to a question, Jamie Dimon said that JP Morgan's exposure to private credit is $50 billion, and Citi reported $22 billion of such loans.
Now, let's talk to the earnings results. As far as the bank earnings results are concerned, the banks with large investment banking and trading business — which is Goldman, Morgan Stanley, JP Morgan, and Citi — did better generally than the banks that are more lending-centric, Wells Fargo and Bank of America. Let's start with Goldman. Goldman's first quarter for 2026, they reported $17.55 in earnings per share versus the street of $16.52. So a beat, and up an impressive 24% versus last year. They had a very impressive 21% return on tangible common equity, which was a solid beat thanks to higher revenue and a much lower tax rate. Higher revenue was mostly due to a huge advisory quarter, which was up 89% year-over-year, strong equity trading, and good results in asset management. However, there was no operating leverage, as revenue and expenses were both up 14%. Also, the tax rate was only 13% versus the usual 21%, and that's not a recurring event. So, all in all, a good quarter, but expectations were high. So, the stock was down on the print. Perhaps it was down because fixed income trading at Goldman was a disappointment and was down 10% versus last year. Goldman's fixed income trading results were a bit strange, in that all the other major banks reported strong trading results. I have to say that over the years I have given up trying to figure out how the market will react to a Goldman print. There is just no way to predict it.
Let's go to JP Morgan. Very good quarter. Reported earnings of $5.94. The street estimate was $5.51. The company generated a very strong 23% return on tangible common equity. Earnings per share and revenue beat. Highlights were a very strong fixed income trading revenue result, up 21% year-over-year, as opposed to the 10% decline at Goldman, and positive operating leverage. Jamie Dimon made plenty of cautionary comments about credit during the conference call. Boy, does he love to do that. But the bank's credit data was quite benign.
Moving on to Wells Fargo. Wells unfortunately has a tendency to report some not-great quarters every now and then, and this was one of those times. 1Q net interest income was weaker than estimates on a sequential net interest margin decline of 13 basis points. The company would have missed earnings but for a lower-than-normal tax rate. Thus, while profits were up 7% year-over-year, much of that increase was from lower taxes. The market does not like it when Wells, or any bank for that matter, misses on net interest income, and the stock was down pretty good on Tuesday. I'd also note that a 13 basis point sequential decline in net interest margin for a bank is actually quite large, and changes in the net interest margin are by far the largest driver of earnings for a lending-focused bank like Wells.
Moving on to Citi, good quarter. Citi reported earnings of $3.06. The street estimate was $2.63. Strong start to the year for Citi with a 13% return on tangible common equity, driven by 14% growth in revenues versus 7% growth in expenses. So nice operating leverage. Trading was good. Investment banking was good. Wealth management was pretty good. And the credit data was quite benign.
Morgan Stanley 1Q earnings of $3.43 versus the street of $3.02 and 32% year-over-year growth. I would call this a best-in-class quarter. Everything did well and the company produced a 27% return on tangible common equity, which is the highest in the industry. Underwriting was a bit softer than the street, but advisory was strong, trading was strong, wealth management was good.
And finally, Bank of America reported earnings of $1.11 versus the street of $1.12. That's 23% year-over-year growth. Pretty good for Bank of America. Solid quarter with a little bit better net interest income than people were looking for, good advisory and equity trading, and a lower provision and benign credit data. Most importantly, for a few years now, Bank of America's return on tangible common equity has been stuck at around 14%. This quarter, that was elevated to 16%. So that's quite good for Bank of America. Better than Wells, but still below the banks like Goldman Sachs, Morgan Stanley, and JP Morgan, which are even more capital-markets-centric than Bank of America.
Now let's turn to how to think about the valuation of the banks. I am putting on the screen a table for the major banks that shows the quarter's return on tangible common equity, the actual dollar amount of tangible common equity per share, and the price of the stock divided by that tangible common equity per share. The general rule of thumb is that a bank with a consistently high return on tangible common equity will have a higher price divided by tangible common equity than other banks. Generally, the banks with large investment banking, trading, and asset management businesses wield higher returns than their more lending-centric competitors. That's why Goldman, Morgan Stanley, and JP Morgan have higher return on tangible common equities and therefore higher price-to-tangible-common-equity valuations.
Notice, and I'll say this for those who can't see it, but for those of you who are watching on the table, that Goldman and JP Morgan are slightly below three times tangible book value. And Morgan Stanley, with the best-in-class return on tangible common equity of 27%, is above three times. Compare that to Wells at 1.8 times and Bank of America at 1.9 times. Goldman Sachs, JP Morgan, and Morgan Stanley all have returns above 20%, while Wells and BofA are at 14 to 16%. The obvious question to ask is why do lending-centric banks have lower returns than the banks with more diversified businesses? The answer is that lending is highly, highly competitive. Banks compete for loans with other banks and with a multitude of non-banks as well. So as a result, net interest margins have been in long-term decline for years, and that has put pressure on returns.
A further word on Goldman and Citi. First, Goldman. Over the past few years, Goldman has completely rerated. A few years ago, Goldman was valued at only 1.3 times tangible book value. But as the capital markets and M&A environment improved, returns improved dramatically and the stock got revalued higher to its current nearly three times tangible book value. That is quite a change. When Goldman was at 1.3 times tangible, it was a value stock. Buying it now at these levels is just a bet that the good times will continue. And with respect to Citi, since the GFC, Citi has had the worst return profile of all the large banks by far. Its return on tangible common equity was consistently below 10%, which stinks. And the stock was valued below tangible book value. CEO Jane Fraser has done a very good job and she has streamlined the bank and improved its return profile. This quarter's 13% return on tangible common equity is the best return level in years, and that is why Citi is now valued at 1.3 times tangible as opposed to what it used to be, which was below tangible. That is still a steep discount to the other large banks, but it is moving in the right direction.
And now for the mailbag. First question is from Antonio, who asks, quote: "Hi Steve, hope you are well. You have been talking about private credit for a while and the situation has been unraveling. What do you think of regional banks in the United States in that context? How exposed are they and how much could this hurt them? Do you think a short position in the KRE ETF is a good way to hedge against the private credit issue, or is the exposure in regional banks not that large?" Regional banks do not have the lion's share of exposure to private credit. In particular, the regional banks in the KRE ETF have actually very little exposure to private credit. The exposure is in the larger banks.
Now, banks provide a great deal of data in what are called reports. The category in question is loans to nondepository financial institutions, otherwise known as NDFIs. And loans to NDFIs are divided up into: one, mortgages; two, business credit; three, private equity; four, consumer; and five, other. It appears that private credit loans are in the business credit category, but it is unclear what percentage of that entire category is private credit. NDFI loan exposure is not evenly distributed across all the banks. It is confined to the 32 largest institutions. The private equity exposure is $315 billion and the total business credit exposure is $335 billion. But again, it is unclear how much of that $335 billion is to private credit. I suspect that at least 50% of the $335 billion is to private credit, but again, that is just a guess.
This quarter, as I discussed, Citi, JP Morgan, and Wells all provided their total exposures to private credit. JP Morgan is $50 billion. In the context of the overall size of JP Morgan, that is not that large, and I feel similarly with respect to Citi and Wells. But again, the banks in the KRE regional bank index do not have much exposure to private credit. My view about the banks is that if and when private credit experiences losses, the banks with exposure will have some losses too. However, many of the bank loans to private credit are senior loans where there is subordination protection underneath. So it is unclear how much in the way of losses the banks will actually suffer. And I also believe that the banks are very well capitalized. So if and when losses appear, this will be an income statement problem, but not a systemic capital problem. As of now, however, bank earnings season indicates that the credit cycle is not yet here.
Second question comes from Amit, who asks, quote: "Dear Steve, I am a big fan of your show. I listen to it weekly and it assists me very much in understanding markets more than any other finance channel out there." Thank you for the compliment. "I would be happy to hear your perspective on high yield, current spreads, credit quality, and how it relates, if at all, to direct private lending, private credit. Thank you, and all the best." Credit spreads are a measurement of risk. All fixed income products are priced off of the Treasury yield curve because Treasuries are considered to be the risk-free rate. All non-US Treasury debt has a higher yield than Treasuries of the same duration. The difference between the yield on a non-Treasury form of debt and Treasuries is called the credit spread. When credit spreads are tight or narrow, that is an indication that investors are optimistic and unafraid of risk. When investors start to worry about credit quality, or worry about anything, in fact, credit spreads widen. Widening credit spreads do not, I want to emphasize, do not necessarily mean that losses are around the corner. It can just be that investors are more afraid.
Because of the bad news surrounding private credit, wide credit spreads can be attractive to investors, as it means that future loans will have higher yields and could be more lucrative. And credit spreads have been widening throughout fixed income, including high yield, thereby making high yield loans in particular appear to be more attractive. That is also why Blackstone and Goldman have both recently raised $10 billion private credit funds from institutional investors. Those new funds are not burdened by exposure to problematic software loans because they'll be making new loans. And that's why these new funds don't help existing investors in private credit. As for predicting this credit cycle, I think, and I've said this before, it's just too early to make any firm decisions. The news flow is bad in private credit, but given the earnings reports of the large banks just this week, credit quality overall is still fine.
And our last question is from Jacob, who asks, quote: "Hi Steve, I love your podcast. Thank you for doing it. Like many people, I have questions about private credit, AI, and software companies. Here's a question I have for you. Everyone seems to be talking about how AI will increase competition in the software sector by decreasing the barriers to entry, but what strikes me is how easy it will be for software customers to actually just build their own internal custom software solutions. If that's true, then it's not just a question of how much competition will increase, but by how much demand will decrease. If we were to think about it that way, would that change the narrative? How much and in what ways? And of course, what should retail investors do because of it?"
This last Monday, April 13th, we hosted Rob Oliver, the software analyst at Baird, and discussed many of these issues. It was a great interview, and everyone should check that out. But to summarize, right now investors are worried about everything when it comes to the AI threat to software. They are worried that AI companies will replace existing software platforms. They are worried that the cost of creating software will decline to such a degree that more software work will be done internally as opposed to purchasing the solution from an outside vendor. They are worried that existing software companies won't be able to raise prices ever again. It's a very long list. It's so early in the story that it's just impossible to know what will happen, and I don't think we will have any degree of clarity for at least a year. That's why my advice is to tread carefully with respect to the software group. It's brutal to try to predict the bottom in a group where the narrative has become so negative.
This coming Monday, we will post an interview with Jeffrey Hirsch, author of the famous Stock Trader's Almanac, a publication started by Jeffrey's father, Yale Hirsch, 60 years ago. In the interview, we discuss trading insights and trends and how the market can be incredibly and consistently seasonal. This episode is part of the Real Eisman Playbook's evergreen series of interviews. They are chock full of useful and fascinating information and the conversations are lively. For stock timers and charters, this episode with Jeffrey Hirsch is fun stuff. So, tune in.
Be sure to check out our website, realeismanplaybook.com. If you're enjoying these weekly wraps and our podcast, we kindly ask that you support the channel by subscribing to our YouTube channel and to our audio channels, The Real Eisman Playbook. Subscribing is the best way to help us expand this community to more like-minded individuals such as yourselves, and we greatly appreciate your support. And that's the wrap.
This podcast is for informational purposes only and does not constitute investment advice. The hosts and guests may hold positions in stocks discussed. Opinions expressed are their own and not recommendations. Please do your own due diligence and consult a licensed financial adviser before making any investment decisions.
