It's the first week of earnings season, and since the banks report first, I will be focusing on the banks. Signs that the economy is strengthening or weakening will show up in bank data usually first. The Justice Department opened a criminal investigation into Fed Chairman Powell. Needless to say, the market did not like this type of political vindictiveness and this attack on the institutional integrity of the Fed. Neither do I. As the stock market has gone up for years now, that increased wealth has gone to upper income levels. But the bottom 80 to 90% of consumers have not kept up. Instead, they have suffered severe inflation in every aspect of their lives. By tying all these themes together, I think I can provide a lens through which we can better understand market developments, the overall health of the stock market, and the relative stability of the underlying economy. So, here goes.
Hi, this is Steve Eisman and welcome to another edition of the weekly wrap. This is for the week ending January 16th, 2026. It's the first week of earnings season and since the banks report first, I will be focusing on the banks. But before we get to earnings, because I received a few questions from viewers asking me about the four themes in my year-end wrap and the five structural themes in my first wrap of 2026, now is a good time to pull back the camera, step back, and connect the dots between the four themes that played out over 2025 and the five broader structural themes that are playing out over a longer stretch of time. In my 2025 year-end wrap, I focused on four themes that played out over the year. And the four themes were one, the K-shaped economy, two, the AI revolution or an AI bubble, three, fears about the growth in private credit, and four, affordability.
And in my first wrap for 2026, I discussed five structural market themes which have played out over many years. One, tech and tech-related stocks dominate the market. Two, traditional consumer stocks matter less and less. Three, even though 70% of US GDP is consumer-driven, the stock market's movements are less and less driven by consumer stocks. And four, the stock market has become unmoored from everyday life. And finally, number five, the above four trends are all reinforced by index investing. By tying all these themes together into a coherent whole, I think I can provide a lens through which we can better understand market developments, the overall health of the stock market and the relative stability of the underlying economy. So here goes. With respect to just 2025, the biggest themes were that the US has a K-shaped economy with most of the growth and good news confined to tech and AI capex. Entire sectors of the United States remain more abundant like housing. So the best investments in 2025 were tech and AI related while other sectors like consumer staples and housing performed very poorly. That's what happened in 2025. But those themes did not just appear out of nowhere. They have been developing for a very long time. This basic story of tech good and many other sectors especially consumer related sectors bad has been playing out over the last 10 years. That is why the info sector now constitutes 35% of the S&P up from 21% 10 years ago. And even that understates tech dominance.
Companies like Google, Meta, Amazon, and Netflix are not in info, but are in communication services and consumer discretionary. So if you add them back to info, the tech sector, liberally defined, is at least 50% of the S&P. No other developed country is so dominated by tech stocks. And the dominance of tech is another facet of the K-shaped economy where more and more of US GDP is being funneled to the top 10% of consumers. As the stock market has gone up for years now, that increased wealth has gone to upper income levels. But the bottom 80 to 90% of consumers have not kept up. Instead, they have suffered severe inflation in every aspect of their lives, from healthcare to consumer staples to housing. So as the majority of consumers have suffered, the sectors that they interact with the most have at the same time shrunk in importance within the S&P. That is why the consumer staples sector was 10% of the S&P in 2015, but has shrunk now to only 5% at the end of 2025. Now, it is true that 70% of the US economy is consumer-driven, but traditional consumer stocks matter less and less, and this means that the market has become increasingly unmoored from the day-to-day lives of most Americans. Finally, index investing reinforces the dominance of tech because 60% of flows are into index funds that just keep buying the stocks they own in the size they own them. I am convinced that when we have a recession or if AI capex slows, the dominance of index investing means that the correction will be fast and furious. Hopefully, I've tied all these themes together into a more coherent whole. The only theme I did not bring up yet was the worries surrounding private equity and private credit. Private credit operates in the unregulated shadow area of debt creation. Rules that banks must comply with do not apply to private credit. In a sense, it gets special treatment and operates by a different set of rules. Private equity operates only at the top of the K. So, it has been able to operate by this different set of rules. As 2026 plays out, I will bring all of these nine themes into play as a tool for framing and integrating news regarding current events and sector and company specific earnings reports. Also, before we get to earnings, I want to flag some very important news. All of which are metrics for the health of the stock market and the economy. The theme in news here is about affordability. There were several pieces of news on affordability. Last week, President Trump ordered Fannie and Freddie to buy $200 billion in mortgage-backed securities, MBS. Although this only amounts to 2% of the entire MBS market, the administration hopes that such extra buying narrows MBS to Treasury spreads and thereby drives down mortgage rates. Maybe, maybe not. Then Trump put out a proposal to cap credit card rates at 10% for a year. And he also proposed eliminating corporate buying of individual homes. What's going on? It's the midterms and President Trump does not want to lose control of Congress. So, the president is putting out multiple proposals dealing with the affordability theme. Now, you can agree with Trump or disagree, but generally he does do what he says he's going to do, thereby potentially creating investment opportunities or trades. Clearly, affordability is now front and center. And next week, President Trump will speak at Davos where he will come with much more comprehensive housing policies. Now, at this point, I have no idea what he will propose, but I'm guessing it will at least have near-term, but perhaps not long-term consequences. But for a trade, I'd be looking at the homebuilders. Now, all of them got beaten down last year. Yes, they all rallied on Friday, but they could have more to go. Lennar, for example, was down 20% in 2025. Now, LEN, as an example, got to 142 last September, but then corrected and got as low as 103, and now it's around 120. But I still think you could see more of a trading rally in these stocks for two reasons. First, mortgage rates are now down to 6%. If they can get down to 5 1/2, my guess is that existing home sales will improve and new home sales will too. Second, and this is actually the more important point, these are not large cap stocks. DHI is the largest at 45 billion. After DHI, the stocks drop off in market cap very quickly. So, if investors decide that it's time to buy the homebuilders, it's a bit like threading an elephant through a needle. The stocks will go up more and faster than you might think. One more thing on housing. The long-term problems of housing, as I've said on prior wraps, are supply problems at the local level. Local regulations that are time-consuming, that add significantly to costs that prevent the building of smaller homes. When President Trump speaks at Davos next week, if he tackles these local issues, you will know he is serious about truly dealing with housing affordability problems. Anything else could improve housing short-term, but that's all. But hey, a trade's a trade. Nothing wrong with that. Not every investment story has to be a long-term one. If President Trump's proposed policies even create an impression that existing and new home sales will increase, the homebuilder stocks will pop. Again, I want to emphasize that homebuilders are not large cap stocks. It does not take a lot to make these stocks go up. Finally, in the news, the Justice Department opened a criminal investigation into Fed Chairman Powell. Needless to say, the market did not like this type of political vindictiveness and this attack on the institutional integrity of the Fed. Neither do I. It's important for our economy, for the dollar, and for interest rates that the Fed maintains its institutional independence. Now, let's turn to earnings season. This first week of earnings season focuses on banks. At the beginning of earnings season, I always focus on the banks for reasons that go well beyond the fact that financials are the second largest sector of the S&P. The banks service the entire economy from large businesses to commercial real estate to small businesses to the high-end and the low-end consumer. They represent the plumbing of the entire economy. And if you know where to look, you can gain insights into the entire economy. Signs that the economy is strengthening or weakening will show up in bank data, usually first, especially in the credit quality statistics that the banks provide when they report. And while the bank results this week were largely fine and credit data was benign, the stocks corrected quite sharply this week and did so for two reasons. First, earnings week did not start well because, as I said before, over the weekend, President Trump called for a one-year cap of 10% on credit card interest. Implementing such a proposal would require congressional legislation, which would not be easy. However, the credit card business is important for many large banks, and the market did not like these headlines. Second, banks had an enormous rally last year and valuations now are quite high relative to history. In some cases, we have not seen valuations like this since before the great financial crisis. So, while the earnings reports were fine, they weren't blowout and so investors took this as an opportunity to take profits. Before we get to bank earnings, let's first ask what variables are most important in bank earnings. And to do that we need to divide the group between the large cap investment banks Goldman and Morgan Stanley and the regional banks. The variables are different and the large cap banks JP Morgan, Citibank, Bank of America, and Wells Fargo are a hybrid of the two models. So first what variables drive investment bank earnings? There are four. One, M&A volume, two, the IPO calendar, three, trading volume, and four, flows into wealth management. The plain vanilla regionals aren't involved very much in investment banking or wealth management. So, their earnings variables are very different. Regional banks are much more dependent on the revenue they derive from making loans. Thus, the dynamics of their net interest income drives revenue and earnings growth. Here the important earnings variables are the net interest margin, loan growth and credit quality. Now for those of you unfamiliar with banks, the net interest margin is simply the average interest rate the bank is charging on its loans and also getting from the bonds it owns less interest expense. And interest expense is a combination of the cost of deposits and the cost of any debt the bank has. The major drivers of the net interest margin are the Fed and the yield curve. Generally, when the Fed cuts rates, net interest margins expand because banks reprice their deposits immediately. So, their costs of funds go down. Although sometimes the reverse is true. It really depends on the bank. But for sure, the steeper the yield curve, the better it is for banks. Right now, net interest margins are expanding because the Fed is cutting rates and the yield curve has gotten steeper. So, when analyzing regional banks, you should look at three variables. Is the net interest margin going up or down? Is there loan growth? Is credit quality getting better, worse, or remaining stable? Now the large cap banks like JP Morgan, Bank of America, Wells Fargo and Citibank are varied combinations of investment banks and regional bank earnings models. So let's see how the group did. The summary is that with the exception of Wells Fargo, which disappointed, the rest of the banks beat earnings and revenue expectations. Investment banking results were quite strong and so was trading. Net interest income trends were also good as the net interest margins of the banks are rising and also and this is the most important part of all for the economy there were no signs of credit deterioration at all in any category credit trends were benign so the fundamentals were fine but I would say banks beat expectations only slightly here's a quick recap of each of the banks JP Morgan revenue was up 7% versus last year a slight beat and EPS also beat slightly. Importantly, credit quality trends were stable in both commercial and consumer. The only negative for JP Morgan was that investment banking fees were down shockingly enough 4% versus last year, but that was due to some M&A deals that were supposed to get closed at the end of last year got pushed out to 2026. Otherwise, another good quarter for JP Morgan. Bank of America also a pretty good quarter. Equity trading was exceptionally strong. Net interest income rose almost 10% which was better than expectations. Both total revenue and earnings per share beat as well as credit trends were fine. Wells Fargo a miss. Wells tends to miss every now and then and I'm never really sure why. It just seems part of its culture that it likes to miss every now and then. EPS missed and net interest income missed as well. Now the misses were not by much. So for example, net income was 21.3 billion versus expectations of 21.6 billion. Hardly anything to cry about, but still with valuations where they are, a miss is not tolerated by the market and the stock was down 5% on the print. Citibank a nice beat pretty much across the board. Citibank beat on earnings per share and revenue largely because of its strong trading results and credit trends were also benign. I would point out that although the results beat, Citibank's return on capital remains the worst amongst the large cap banks by far. Despite the progress Jane Fraser, the CEO, has made with the company, and she's made a lot of progress, the return on tangible common equity has never gotten past 9%. And this quarter was only 7 1/2%. As we shall see, such returns are poor compared to the other large banks. Goldman Sachs and Morgan Stanley both beat on earnings per share and revenue as investment banking, trading and wealth management all reported strong results. The bottom line here is that with respect to investment banking, we are in the midst of a strong cycle. Trading is strong and M&A is growing rapidly. However, the IPO calendar has been okay but not great. But all in all, it's a good time for investment banks like Goldman Sachs and Morgan Stanley. On its conference call, Goldman's CEO stated that the investment banking backlog is at the highest level it's been in four years. With respect to plain vanilla banking, here times are good, too. With the Fed cutting rates and the yield curve steepening, net interest margins are expanding. And so far, credit quality trends are fairly benign. Yes, I know that banks have the ability to extend and pretend, meaning they can push out problems like commercial real estate, but they can do that for quite a while. What is the narrative as to why the banks have done well over the past year? Well, the fundamentals are strong, but it's more than just that. Since the great financial crisis, the banks have been punished justifiably by the regulators. They have been forced to delever, which has hurt their overall profitability. This administration, however, is looking to loosen some capital requirements, which would mean that banks could buy back more of their shares, and regulators have changed their tune, importantly, on bank mergers. The United States has not experienced a bank M&A wave since the 1990s, but now we need one in my view. The cost of technology and regulation has driven up the costs of all banks and the smaller ones need to get larger to be able to compete with the likes of JP Morgan. So the two parts of the bull case with respect to banks is that investment banking is strong and net interest margins are expanding and with respect to the regionals most of whom we'll report next week we are in the beginning stages of an M&A wave. Finally let's just look at how to value banks. Banks are mostly valued at multiples of tangible book value. Generally, the higher the return on tangible common equity, ROTCE, the higher the price to tangible book value. But bank valuations operate within a range and the banks are now being valued at peak levels. So, for example, two years ago, Goldman was at 1.3 times tangible book value. Today, as you'll see in the table, it is closer to three times. The last time Goldman was at these levels was before the great financial crisis. Morgan Stanley is also at its pre-GFC levels. Even Citibank is being valued at above tangible book value, even though its return on tangible common equity never even gets to 10%. So, if you were thinking about investing in the large cap banks, you should know these are no longer value plays. You were just playing strong fundamentals. And in the end, that's why I think these stocks corrected when they reported this week. Given the valuations, the results were just not good enough. Although the group did rally back some on Thursday on the strong results from Goldman and Morgan Stanley. And that's the wrap for January 16th, 2026. This last Monday, I posted an interview with Warris Bukhari, the CEO of a private company called Claimable. It's a company where a consumer can go for help in appealing a denial of a health care claim by a health insurance company. Warris Bukhari brings a unique perspective about the inherent problems with the US's health insurance system from private health insurance to Medicare to Medicaid to Obamacare. And we discussed these issues at length. I interviewed Warris because too often stock analysts who cover health insurance companies just focus on the near-term problems facing these companies. But Warris believes that the problems facing health insurance companies like UnitedHealth go far deeper than just near-term rising medical costs. He thinks the problems are deeply structural. And I think after you hear what he has to say, you will look at health insurance stocks differently. So check it out. Let me just add a personal note about this episode. Warris's company does something very important. It appeals the denials of insurance companies. If you have a relative or a friend who's been denied a claim and you think that is wrong, I really implore you to watch this episode. And if you like what you hear, you should check out Warris' company, Claimable. Now, one other point about the Warris Bukhari episode. I just want to emphasize I have no financial skin in this game. I do not get a cut from Warris' company at all. I just think what he does is very, very important and all of you should really check it out. This coming Monday, I will post an interview with Gary Marcus, retired professor at NYU of psychology and neuroscience. Gary is a leading critic of AI large language models. He argues that LLMs have reached diminishing returns in scaling larger and that this scaling is an intellectual dead end. Gary was a lone wolf in this position for a long time, but his views are now gaining a great deal of traction. And I've been following Gary for quite a while. He is an important critic of the entire AI enterprise as it is currently conceived and you generally don't hear his point of view on business news. He has an important viewpoint that everyone should hear. If he is right, the torrid growth in AI that we have seen may slow and that would have very broad implications for the overall market. Hope you tune in. If you haven't already, please consider subscribing to our YouTube channel so you can receive these weekly wraps along with our podcast and the financial literacy master classes. Subscribing is the best way to help the channel and we really, really greatly appreciate your support. Also, be sure to check out our website realismanplaybook.com. There you can easily access all our episodes as well as the financial literacy master classes, our blog, and some other goodies as well. Check it out and see you soon.
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.
